Aeronautical Charges Framework –
Second Consultation Paper
18 June 2019
2
TABLE OF CONTENTS
GLOSSARY ............................................................................................................... 4
EXECUTIVE SUMMARY ............................................................................... 10
BACKGROUND ............................................................................................ 12
Statutory basis of price cap ...................................................................................... 12
Objective of Consultation Paper ............................................................................... 12
Context .................................................................................................................... 13
Complementary initiatives for the RAB ..................................................................... 19
KEY POLICIES UNDERLYING RAB FRAMEWORK ................................... 20
Written stakeholder feedback from October 2018 Consultation Paper...................... 20
Application of RAB framework on MAHB and exclusion of other airport operators ... 20
Form of control ......................................................................................................... 21
Form of till ................................................................................................................ 22
Starting RAB ............................................................................................................ 23
Regulatory Period .................................................................................................... 24
Groupings of tariffs ................................................................................................... 25
Tariff setting ............................................................................................................. 26
User fees ................................................................................................................. 27
Capex responsibility ................................................................................................. 27
WACC ...................................................................................................................... 28
Regulatory risk ......................................................................................................... 29
Adjustment mechanisms .......................................................................................... 29
REVIEW OF MAHB NOVEMBER 2018 SUBMISSION ................................. 30
Opening RAB ........................................................................................................... 30
MAHB Business Plan & key strategies ..................................................................... 31
Capital expenditure .................................................................................................. 36
Key projects – before & after verification .................................................................. 39
Operating costs & drivers ......................................................................................... 49
Depreciation & amortisation ..................................................................................... 55
Non-regulated revenues (commercial and other) ..................................................... 56
WACC ...................................................................................................................... 61
Traffic forecast from MAHB for RP1 ......................................................................... 66
SUMMARY OF ADJUSTMENTS TO MAHB’S SUBMISSION ...................... 69
ILLUSTRATIVE PRICE CAP......................................................................... 77
ILLUSTRATIVE TARIFF STRUCTURE ........................................................ 78
Differentiated charges by level of service and infrastructure ..................................... 78
Transfer PSC ........................................................................................................... 79
Landing & parking fees ............................................................................................ 80
Option #1 – Single network ...................................................................................... 80
Option #2 – Geographical clusters ........................................................................... 81
Option #3 – Geographical clusters, with equalised International PSC ...................... 82
MAHB’s tariff proposal per June 2019 submission ................................................... 83
MAHB’S JUNE 2019 SUBMISSION ............................................................. 84
MAHB’s proposed tariff – Option #1 ......................................................................... 92
3
MAHB’s proposed tariff – Option #2 ......................................................................... 93
MAHB’s proposed tariff – Option #3 ......................................................................... 93
CONSULTATION PROCESS ........................................................................ 94
NEXT STEPS ................................................................................................ 95
Details of the consultation ........................................................................................ 95
APPENDIX 1: TRAFFIC FORECAST FROM MAHB ............................................... 96
Historical traffic (2012 to 2018) ................................................................................. 96
MAHB’s forecasted passenger traffic (2019 to 2022) ............................................... 97
MAVCOM’s forecasted traffic (2020-2022) ............................................................... 98
Description of MAVCOM’s passenger traffic forecast model .................................... 99
Forecast data and parameters ............................................................................... 101
MAVCOM’s passenger traffic forecast .................................................................... 102
Advantages and limitations of MAVCOM’s passenger traffic forecast model .......... 105
References............................................................................................................. 106
APPENDIX 2: AIRPORT FACILITIES DATA ........................................................ 107
4
GLOSSARY
Abbreviations
ACC Airport Consultative Committee
Act 771 Malaysian Aviation Commission Act 2015 [Act 771]
AFRS Airport Fire Rescue Service
AGL Airfield Ground Lighting
AICC Assets in the course of construction
Airport REIT Airport Real Estate Investment Trust
ASQ Airport Service Quality
AVSEC Aviation Security
bbl barrel
BHS Baggage Handling System
BIMP-EAGA Brunei, Indonesia, Malaysia, the Philippines & Timor Leste – East
ASEAN Growth Area
BP Business Plan
capex Capital expenditure
CAGR Compounded Annual Growth Rate
CAPM Capital Asset Pricing Model
CCR Constant Current Regulator
CCTV Closed Circuit Television
CP Contact Pier
CIP Capital Investment Plan
Commission Malaysian Aviation Commission
EPS Electrical Power Systems
F&B Food & beverages
FIDS Flight Information Display System
FTE Full time employee
GAS Gate Allocation System
GDC Gas District Cooling
GDP Gross domestic product
GLC Government-linked company
GoM Government of Malaysia
GPU Ground Power Unit
HQ Headquarters
5
Abbreviations
ICAO International Civil Aviation Organisation
ILHBS In-line Hold Baggage Handling System
IMT-GT Indonesia-Malaysia-Thailand Growth Triangle
KUL Kuala Lumpur International Airport
LOS Level of Service
MA Management Agreement
MA Sepang Malaysia Airports (Sepang) Sdn Bhd
MA (Niaga) Malaysia Airports (Niaga) Sdn Bhd
MAHB Malaysia Airports Holdings Berhad
MASB Malaysia Airports Sdn Bhd
MAVCOM Malaysian Aviation Commission
MGP Minimum Guaranteed Payment
MGS Malaysian Government Securities
Minor Repex Minor repair expenditure
MoT Ministry of Transport
mppa Million passengers per annum
MTB Main Terminal Building
NAP National Aviation Policy
NPV Net present value
OA Operating Agreement
PBB Passenger boarding bridge
pax Passenger
PCA Preconditioned Air Unit
Peninsular Peninsular Malaysia
pph Passengers per peak hour
PSC Passenger Service Charge
PSSC Passenger Security Service Charge
QoS Quality of Service
R&M Repairs and Maintenance
RAB Regulated Asset Base
Repex Repair expenditure
RET Rapid Exit Taxiway
RM Ringgit Malaysia
RP1 First regulatory period
6
Abbreviations
RP2 Second regulatory period
SATS Senai Airport Terminal Services Sdn Bhd
SITC Supply Installation Testing Commissioning
STOLports Short Take-off and Landing Ports
TMDSB Tanjung Manis Development Sdn Bhd
TTS Track Transit System
UOP Unit of Production
USD United States Dollar
User-pay principle A framework where the user pays for airport infrastructure
WACC Weighted average cost of capital
VDGS Visual Docking Guidance System
YoY Year-on-Year
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7
AIRPORT CODES
No. Airport
code
Airport name No. Airport
code
Airport name
1 AOR Sultan Abdul Halim
Airport, Alor Setar
14 LDU Lahad Datu Airport
2 BKI Kota Kinabalu
International Airport
15 LGK Langkawi International
Airport
3 BTU Bintulu Airport 16 LMN Limbang Airport
4 IPH Sultan Azlan Shah
Airport, Ipoh
17 MKZ Melaka Airport
5 JHB Senai International Airport 18 MYY Miri Airport
6 KBR Sultan Ismail Petra
Airport, Kota Bharu
19 MZV Mulu Airport
7 KCH Kuching International
Airport
20 PEN Penang International
Airport
8 KTE Kertih Airport 21 SBW Sibu Airport
9 KUA Sultan Ahmad Shah
Airport, Kuantan
22 SDK Sandakan Airport
10 KUL Kuala Lumpur
International Airport
23 SZB Skypark Terminal Sultan
Abdul Aziz Shah Airport,
Subang
11 KUL-T1 Kuala Lumpur
International Airport
Terminal 1
24 TGG Sultan Mahmud Airport,
Kuala Terengganu
12 KUL-T2 Kuala Lumpur
International Airport
Terminal 2
25 TWU Tawau Airport
13 LBU Labuan Airport
8
TABLES
Table 1 – MAHB assets as at 31 December 2018 ............................................................... 31
Table 2 – Overall RAB and price cap for all airports (MAHB November 2018) .................... 33
Table 3 – Overall RAB and price cap for KUL (MAHB November 2018) .............................. 34
Table 4 – Overall RAB and price cap for Peninsular (MAHB November 2018) .................... 34
Table 5 – Overall RAB and price cap for Sarawak (MAHB November 2018) ....................... 35
Table 6 – Overall RAB and price cap for Sabah (MAHB November 2018) .......................... 35
Table 7 – Summary of proposed capex ............................................................................... 39
Table 8 – List of proposed projects at KUL .......................................................................... 41
Table 9 – List of proposed projects at BKI ........................................................................... 42
Table 10 – List of proposed projects at PEN ....................................................................... 43
Table 11 – List of proposed projects at KCH ....................................................................... 44
Table 12 – List of proposed projects at LGK ....................................................................... 45
Table 13 – List of proposed projects at SZB ........................................................................ 46
Table 14 – List of proposed projects at TWU ...................................................................... 47
Table 15 – List of proposed projects at SBW ...................................................................... 48
Table 16 – Elasticity assumptions for staff number estimates ............................................. 50
Table 17 – Depreciation policies ......................................................................................... 55
Table 18 – WACC assumptions .......................................................................................... 62
Table 19 – Gearing Ratios & Operations Cash Flow/Debt Ratio ......................................... 63
Table 20 – Overall RAB and price cap for all airports (MAVCOM draft base case) .............. 71
Table 21 – Overall RAB and price cap for KUL (MAVCOM draft base case) ....................... 72
Table 22 – Overall RAB and price cap for Peninsular (MAVCOM draft base case) ............. 72
Table 23 – Overall RAB and price cap for Sarawak (MAVCOM draft base case) ................ 73
Table 24 – Overall RAB and price cap for Sabah (MAVCOM draft base case) .................... 73
Table 25 – Illustrative price cap for all airports .................................................................... 77
Table 26 – Illustrative price cap per cluster ......................................................................... 77
Table 27 – Illustrative tariffs: Option #1 ............................................................................... 80
Table 28 – Illustrative tariffs: Option #2 ............................................................................... 81
Table 29 – Illustrative tariffs: Option #3 ............................................................................... 82
Table 30 – Comparison from MAHB’s November 2018 to June 2019 capex plan ................ 85
Table 31 – Comparison from MAHB’s November 2018 to June 2019 capex plan for KUL ... 86
Table 32 – Comparison from MAHB’s November 2018 to June 2019 capex plan for PEN .. 87
Table 33 – Comparison from MAHB’s November 2018 to June 2019 capex plan for LGK .. 88
Table 34 – Comparison from MAHB’s November 2018 to June 2019 capex plan for SZB ... 88
Table 35 – Comparison from MAHB’s November 2018 to June 2019 capex plan for TWU . 89
Table 36 – Overall RAB and price cap for MAHB - all airports (MAHB June 2019) .............. 89
Table 37 – Overall RAB and price cap for MAHB – KUL (MAHB June 2019) ...................... 90
Table 38 – Overall RAB and price cap for MAHB – Peninsular (MAHB June 2019) ............ 90
Table 39 – Overall RAB and price cap for MAHB – Sabah (MAHB June 2019) ................... 91
Table 40 – Overall RAB and price cap for MAHB – Sarawak (MAHB June 2019) ............... 91
Table 41 – MAHB’s proposed tariff Option #1 ..................................................................... 92
Table 42 – MAHB’s proposed tariff Option #2 ..................................................................... 93
Table 43 – MAHB’s proposed tariff Option #3 ..................................................................... 93
Table 44 – Variables used in MAVCOM’s passenger traffic forecast model ........................ 99
9
Table 45 – MAVCOM’s regression model by cluster ......................................................... 100
Table 46 – Variables employed to forecast passenger traffic, 2019 – 2022 ....................... 101
Table 47 – Facilities matrix at MAHB airports .................................................................... 107
FIGURES
Figure 1 – Historical PSC in Malaysia ................................................................................. 14
Figure 2 – International PSC benchmarking – Global as at 31 March 2019 ......................... 15
Figure 3 – Domestic PSC benchmarking – Global as at 31 March 2019 ............................. 16
Figure 4 – Historical landing and parking fees in Malaysia .................................................. 17
Figure 5 – Benchmark analysis on turnaround costs regionally ........................................... 18
Figure 6 – MAHB BP ........................................................................................................... 32
Figure 7 – Average weekly Beta (until 31 March 2019) ....................................................... 65
Figure 8 – Actual vs. forecasted passenger traffic, 2012 – 2018 ......................................... 67
Figure 9 – MAVCOM vs. MAHB: Malaysia passenger traffic forecast, 2018 – 2022 ............ 68
Figure 10 – Price cap on a network level, All airports .......................................................... 74
Figure 11 – Price cap by cluster, KUL ................................................................................. 74
Figure 12 – Price cap by cluster, Peninsular ....................................................................... 75
Figure 13 – Price cap by cluster, Sarawak .......................................................................... 75
Figure 14 – Price cap by cluster, Sabah .............................................................................. 76
Figure 15 – Actual vs. forecasted passenger traffic, 2012 - 2018 ........................................ 97
Figure 16 – Original vs. Revised Passenger Traffic Forecast, 2017 – 2022 ........................ 98
Figure 17 – Air passenger traffic, Malaysia, 2007 – 2022 .................................................. 102
Figure 18 – MAVCOM vs. MAHB: Malaysia passenger traffic forecast, 2018 – 2022 ........ 103
Figure 19 – MAVCOM vs MAHB: KUL passenger traffic forecast, 2018 – 2022 ................ 103
Figure 20 – MAVCOM vs MAHB: Peninsular passenger traffic forecast, 2018 – 2022 ...... 104
Figure 21 – MAVCOM vs MAHB: Sabah passenger traffic forecast, 2018 – 2022 ............. 104
Figure 22 – MAVCOM vs MAHB: Sarawak passenger traffic forecast, 2018 – 2022 ......... 105
10
EXECUTIVE SUMMARY
The Malaysian Aviation Commission is responsible for the economic regulation of
aviation service charges in Malaysia. Pursuant to section 46 of Act 771, the Malaysian
Aviation Commission is responsible for the economic regulation of the aviation service charges
in Malaysia, which includes the power to set airport1 aeronautical charges2 such as the PSC3,
landing fees and aircraft parking fees.
Setting out the illustrative tariffs for the incentive-based, cost-related airport
aeronautical charges setting framework. The Commission has been developing an airport
aeronautical charges mechanism premised on an incentive-based, cost-related RAB
Framework which shall serve as the long-term methodology for setting airport aeronautical
charges for all commercial airports in Malaysia. The Commission’s plan to develop this
framework was announced to industry stakeholders in the August 2017 Consultation Paper
on the PSC, and further discussed in the Information and Consultation Papers published in
February and October 2018 respectively. This Consultation Paper lays out the first illustrative
tariffs setting out the level of airport aeronautical charges expected to commence in January
2020.
The need for investment balanced against necessity and affordability. The Commission
has endeavoured to balance the need for investment and asset replacement during RP1
against key stakeholder issues such as the impact on airport aeronautical charges, quality of
service, timelines, cost of capital, passenger traffic forecast, affordability and capex quantum.
Several key policy decisions relating to the RAB Framework have been made. The
Commission has made several key policy decisions from the issuance of the Consultation
Paper in October 2018 and after MAHB had submitted a BP and CIP on 30 November 2018.
These policy decisions relate to, amongst others, the form of control, form of till, starting asset
base and term of the regulatory period.
The Commission has performed a review of MAHB’s November 2018 BP. As part of the
development of the RAB Framework, MAHB submitted a BP and CIP in November 2018 for
the Commission’s consideration. MAHB’s November 2018 BP included a capex plan of
RM11.2 billion (for the 2019-2022 period), or RM10.0 billion for RP1 (2020-2022 period). The
Commission subsequently performed a review of MAHB’s BP and CIP and formed its view of
the submission, including proposed adjustments to the capex, operating costs, depreciation,
cost of capital and traffic projections. The Commission’s current view is that only an amount
of RM5.0 billion of capital expenditures can be admitted into the RAB for RP1 (2020-2022
period).
1 Airport refers to the definition of “aerodrome” as provided for in Act 771. 2 Airport aeronautical charges refers to a category of charges within the “aviation services charges” as provided for in Act 771. 3 Cited together with PSSC.
11
MAHB subsequently submitted updates to its BP and CIP on 3 June 2019. MAHB
subsequently on 3 June 2019 submitted updates to its BP and CIP to the Commission which
include a capex plan of RM6.2 billion for the 2019 to 2022 period (RM5.2 billion for RP1) and
a proposed tariff structure. Due to the short time available, the Commission has not performed
a review of this plan. However, the updated plan is added to this Consultation Paper in Section
8.0. Both the plans submitted in November 2018 and June 2019 were approved by MAHB’s
Board of Directors.
The Commission shall facilitate consultation sessions between MAHB and airlines
subsequent to the issuance of this Consultation Paper. Since commencing development
of the RAB Framework up to May 2019, the Commission has conducted a total 41 clarification
sessions totaling 94 hours of engagement with MAHB (via both face-to-face meetings and
conference calls) to discuss the BP and CIP. The Commission will also facilitate consultation
sessions between MAHB and the airlines pursuant to the issuance of this Consultation Paper.
These consultation sessions are part of a process intended to ensure that MAHB’s BP and
CIP, and consequently the charges, are defensible. The outcome of this exercise will form the
basis of the Commission’s price cap intended for implementation in RP1.
The Commission intends to set differentiated tariffs. In arriving at the illustrative tariff
structure, the Commission examined the current level of facilities and services at the airports,
the current structure of charges (including the impact of domestic, ASEAN and long-haul PSC,
as well as the historical relationship of PSC, landing and parking fees), and considered the
airport network-based tariff structure versus cluster-based tariff structure.
The Commission invites comments on this document. The Commission is inviting
comments within 4 weeks of publication of this Consultation Paper; to be received by 5pm on
Thursday, 18 July 2019. The Commission will release a paper by October 2019 to announce
its final decision.
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Disclaimer: The opinions and information contained in this document are for consultation purposes only and should not be taken
as the final airport aeronautical charges framework and tariffs. The views reflected in this consultation paper only provide an
indication on the airport aeronautical charges framework and must not be construed as the Commission’s final stance on the
airport aeronautical charges framework and tariffs. The Commission shall not be responsible for, inter alia, any decision, financial
loss or damages incurred due to any reliance on this document.
12
BACKGROUND
Statutory basis of price cap
The Commission is responsible for the setting of airport aeronautical charges. Section
46 of the Malaysian Aviation Commission Act 2015 states that the Commission shall have the
power to do the following:
a) set charges, including maximum charges, or establishing the method for determination
of such charges for aviation services;
b) carry out reviews of PSC, aircraft landing and parking fees, third party ground handling
charges and other aviation charges at such intervals as the Commission decides; and
c) following such reviews, revise any charges set or method established as the
Commission decides.
The Commission had conducted PSC reviews in 2016 and 2017. Following a review, the
Commission conducted a PSC revision in October 2016 which included the introduction of an
ASEAN PSC, the equalisation of PSC at KUL in one years’ time and the introduction of a
service level mechanism called the QoS framework. The Commission then issued a
consultation paper on full equalisation of the rates at KUL-T1 and KUL-T2 in August 2017.
Embarked on the development of a cost-based airport aeronautical charges framework
in 2017. Following PSC revisions in 2016 and 2017, the Commission subsequently embarked
on the development of an airport aeronautical charges setting framework premised on a
Regulatory Asset Base intended, amongst others, to facilitate a fair rate of return for the airport
operator, more commercial and service-mindedness by the airport operator, more robust
capex planning and execution and more efficient operations. These objectives would be
pursued by providing a cost-based method for charging users together with extensive
consultation with stakeholders. The Commission also released an Information Paper in
February 2018 and a Consultation Paper in October 2018, from which written feedback from
users were obtained.
Objective of Consultation Paper
Purpose of this Consultation Paper is to introduce illustrative tariffs for the airport
aeronautical charges framework. The purpose of this Consultation Paper is to introduce
illustrative tariffs for the RAB framework which consists of the price cap mechanism for long-
term, incentive-based airport aeronautical charges for Malaysian airports and to provide
stakeholders with the opportunity to provide feedback on the proposed framework.
This Consultation Paper shall be read together with The Commission’s Information Paper and
Consultation Paper which were published in February and October 2018 respectively.
13
Context
Malaysia is one of several countries in the world which has an airport network structure, where
one company operates and manages most of the commercial airports within a single
ownership and control structure. The entity, MAHB, manages and operates 39 out of 42
commercial airports, including 18 STOLports. The remaining commercial airports are operated
by SATS in Senai, Johor and Kertih, Terengganu; and TMDSB in Tanjung Manis, Sarawak.
The Commission is excluding SATS and TMDSB from the RAB Framework whereby both
operators are required to submit their proposed charges to the Commission for approval
before any revision.
As highlighted in the October 2018 Consultation Paper, the capex responsibility under the OA
signed in 2009 is shared between the GoM and MAHB’s two subsidiaries, MA Sepang and
MASB. The RAB Framework is usually applied where the airport has full responsibility and
autonomy for both the expansion and operational expenditure at the airport, and the
framework to be applied in Malaysia will consider the local context accordingly.
The Commission takes note that the Malaysian Cabinet on 5 April 2019 had approved and
announced for the two OAs currently with MA Sepang and MASB to be substituted with 4 new
OAs, which are categorised in accordance to geographical clusters — for KUL, Sarawak and
Sabah airports, as well as for all airports in Peninsular. The Cabinet also approved for a longer
duration of the OA until 2069, an additional 35 years over the current OAs which expires in
2034.
As highlighted in the October 2018 Consultation Paper, the split capex responsibilities
between the GoM and MAHB is a unique arrangement and has posed some challenges. The
GoM’s default funding responsibility for airport development as stated in the OA had resulted
in most of Malaysia’s airport infrastructure being paid out of general GoM taxation revenues.
Moreover, MAHB is required to obtain the approval of GoM for expansion or upgrade works
at any particular airport before proceeding with the tender and award of projects.
In terms of the history of the PSC, the domestic and international PSC was set at RM5 and
RM40 respectively in 1998. The PSC underwent a few revisions, one of which was associated
with the opening of new terminal (LCCT in 2006). The latest revisions were effected in 2017
and 2018, whereby the ASEAN PSC was introduced, resulting in a lower rate of RM35
compared to the Beyond ASEAN PSC. Meanwhile, the Beyond ASEAN and domestic PSC
were set at RM73 and RM11 respectively. For landing and parking fees, these were raised in
stages over a 3 year period commencing 2012. These fees had not been reviewed for a total
of 17 years prior to that.
All tariffs had been implemented on a uniform basis historically (with the exception of
departures from secondary domestic airports to ASEAN destinations or to points in BIMP-
EAGA and IMT-GT).
14
Figure 1 – Historical PSC in Malaysia
Source: MAVCOM
In formulating the PSC for airports in Malaysia, the Commission was cognisant of the desire
for the cost of air travel in Malaysia to remain relatively affordable. Despite the revised PSC
structure announced in October 2016, PSC in Malaysia for both domestic and international
destinations remain amongst the lowest regionally and globally.
For instance, in comparison with other airports in ASEAN, the Malaysian domestic PSC of
RM11 remains amongst the lowest compared to other ASEAN airports such as Jakarta, Bali,
Bangkok, Manila, and Phnom Penh, with the only 3 airports with lower domestic PSC being
Yangon, Haneda, and Vientiane.
The equalisation of international PSC between KUL-T1 and KUL-T2 at RM73 took place in
2018. After the equalisation, Malaysia’s international PSC of RM73 is still lower compared to
Singapore and most major airports outside of ASEAN such as London, Dubai, Paris and
Seoul.
The Commission had also undertaken a comparison of charges on the basis of aircraft
turnaround costs, which takes into consideration the PSC, landing and parking fees at airports
regionally. The analysis was done based on A320 and A330 aircraft, as depicted in Figure 5.
It can be seen that KUL turnaround costs remain amongst the lowest in the region.
The GoM is planning to impose a Departure Levy for all departing international air travellers
starting from 1 July 2019. The proposed levy rates are two-tiered at RM20 and RM40 on air
travellers flying to ASEAN countries and Beyond ASEAN countries respectively.
5 5 5 5 6 6 6 6 69 9 9 9 9 9 9 9 9 9
11 11
6 6 6 6 6 6 6 6 6 6 6
11 11
65
35 35
40 40 40 40
45 45 45 45 45
51 51 51 51
65 65 65 65 65 65
73 73
35
25 25 25 25
32 32 32 32 32 32
50
73
0
10
20
30
40
50
60
70
80
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
RM
Domestic Domestic - LCCT / klia2 ASEAN Beyond ASEAN Beyond ASEAN - LCCT / klia2
LCCT opens
OA signed
PSC revision
klia2 opens
PSC revision
15
Figure 2 – International PSC benchmarking – Global as at 31 March 2019
Source: MAVCOM, airport websites
36.00
74.00
0.0
50.0
100.0
150.0
200.0
250.0
300.0K
UL A
sean
Bru
nei
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ai
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rk O
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lom
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RM
PSC Govt Charges/Tax Current PSC Charges Current PSC Charges + Proposed Levy
56.00
114.00
16
Figure 3 – Domestic PSC benchmarking – Global as at 31 March 2019
Source: MAVCOM, airport websites
12.00
0.0
10.0
20.0
30.0
40.0
50.0R
M
PSC Govt Charges/Tax
17
Figure 4 – Historical landing and parking fees in Malaysia
Source: MAVCOM
18
Figure 5 – Benchmark analysis on turnaround costs regionally
Source: MAVCOM, IATA Charges manual
7.0
15.6
8.7
19.1
12.9
26.9
13.4
28.7
16.3
33.4
16.6
33.8
18.5
38.5
28.3
56.8
27.4
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0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
A320 A330
Airp
ort
Tu
rna
rou
nd co
st,
RM
th
ou
san
d
KUL (ASEAN) MNL KUL (INT) CGK DMK BKK SGN SIN HKG
19
Complementary initiatives for the RAB
The Commission recognises that for the full benefits of the RAB framework to be realised, the
identification of a NAP, which would identify clear objectives and priorities for the development
of the civil aviation sector, would be highly beneficial. NAP will set out the GoM’s priorities and
policies, from which subsequent decisions could be holistically and consistently applied into
plans such as the proposed Airport REIT and Departure Levy. There could also be, for
example, clear objectives to maximise air connectivity, enable foreign investment and improve
passenger experience whilst meeting ICAO technical standards for safety and security.
Next, it is important for aviation services players to have a regulatory and governance system
that is stable, transparent and non-discriminatory. Commercially stable and viable operators
would require an independent governance system which would allow for the execution of its
own corporate strategy and BP in order to achieve its commercial as well as strategic
objectives. Consistent indications of the opposite would spell challenges for the airport
operator, its management, investors and the financial markets due to higher regulatory risks.
The airport operator should have control over the execution of its BP and CIP, which would
result in a more efficient and disciplined capital planning process which may in turn improve
the quality of the passenger experience at Malaysia’s airports. The arrangement where the
airport operator is responsible for airport developments and its funding is aligned with global
practices and typically results in a more efficient, disciplined and cost-conscious airport capital
planning approach, and with airports designed in accordance with commercial and industry
needs.
The Commission continues to propose for the Malaysian airport industry to move towards a
user-pay principle rather than burdening taxpayers, some of whom are not air travellers.
However, the Commission recognises that this is a significant change from the current
arrangement, and it recognises the potential impact on affordability to users.
The Commission also recognises the need for a national airports industry strategy that would
set out clear policies of the airports industry in Malaysia. The Commission is currently working
closely with MoT to develop this, which will take into account multimodal connectivity, capacity
and expansion plans. This will help to ensure a holistic and consistent implementation of
policies and regulations which will in turn impact day to day operations of the aviation industry.
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20
KEY POLICIES UNDERLYING RAB FRAMEWORK
Written stakeholder feedback from October 2018 Consultation Paper
Subsequent to the release of the October 2018 Consultation Paper, the Commission received
24 written responses from aviation and non-aviation stakeholders in November 2018, including
airlines, airport operators, aviation associations and investment institutions. Of the 24 written
responses, 16 of the stakeholders released published reports pursuant to the release of the
October 2018 Consultation Paper.
The stakeholders who provided written feedback to the Commission are broadly supportive of
the development of the RAB Framework, particularly on its emphasis on cost linkage and
consultation, while at the same time have differing views on some details of the planned RAB
Framework. The Commission’s response, and explanations of the decisions taken, are
described in the section below.
Application of RAB framework on MAHB and exclusion of other airport
operators
The Commission had previously written in the February 2018 Information Paper and the
October 2018 Consultation Paper that a structured framework of economic regulation of the
airports industry in Malaysia is required due to the implied high degree of market power of
MAHB, resulting from their operation of almost the entire airport network in Malaysia. As such,
the Commission proposed to implement the RAB framework for the purposes of setting airport
aeronautical charges for MAHB.
The Commission also undertook a market power assessment and found that SATS operates
Senai Airport in a distinguishable market from Singapore and the rest of Malaysia, and is the
monopoly provider of air transportation infrastructure to airlines for that market. However,
despite the monopoly status, Senai Airport is unable to exercise its market power due to the
existence of a countervailing buyer power of a dominant airline operating at the airport.
Therefore, the Commission proposes for SATS to be excluded from the regulated airport
aeronautical charges framework currently intended for MAHB but is still subjected to a tariff
oversight and approval process.
Stakeholder feedback
Only one stakeholder questioned the Commission’s preference for the RAB Framework for
MAHB, arguing that MAHB actually does not have market power due to the strong bargaining
power of the airline oligopoly in Malaysia and thus the market would be better served with a
light-touch regulation format.
On the proposal to exclude SATS from the RAB Framework, 2 stakeholders disagreed. The
arguments made were that the current level of incentives may not remain as high in the future
and that airlines do not have countervailing market power. The comments were followed by
21
suggestions that SATS should still be regulated on either a standalone basis or a “negotiation-
appeal” procedure.
Commission views
The Commission considers that the RAB Framework is appropriate for MAHB due to its
business model as an airport network operator with a near-monopoly position in the Malaysian
airports industry, capturing a 96.7% share of total passengers in 2018 (99.1 million pax out of
total Malaysian passenger market of 102.4 million). Based on the GoM’s decision on the OA
in April 2019, MAHB will have a long-term concession until 2069 to operate GoM-owned airport
assets throughout Malaysia (with airports in almost every state). MAHB is operating in an
industry that has significantly high barriers to entry. As such, the Commission is proceeding to
carry out the RAB Framework on MAHB. The RAB Framework allows for charges to be
differentiated according to the level of facilities. This is in-line with the Commissions view that
MAHB needs to be subjected to regulations, given the services that are rendered at the airports
and its implied market power
The Commission is also proceeding to exclude Senai Airport from the RAB Framework due to
the lack of effective market power because of a strong countervailing buyer power of a
dominant airline operating at the airport. The Commission is also proposing to exclude Kertih
Airport and Tanjung Manis Airport from application of the RAB Framework as the passenger
traffic levels there are below the threshold that the Commission deems to be significant for an
independent market power study to be conducted (more than 500,000 passengers per annum)
and to be subjected to the RAB Framework.
Form of control
As described in the February 2018 Information Paper, there are a number of implementation
options for the form of charges control: price cap, revenue cap or hybrid cap. The main
difference is the degree of traffic risk assumed by the airport operator under a particular form
of control. The airport operator undertakes the highest degree of traffic risk in a price cap and
lowest in a revenue cap. In addition, a price cap provides the most incentive for out-
performance relative to targets set by the RAB, while the revenue cap allows for greater
certainty of revenue for the airport operator relative to traffic which would thus be appealing to
debt subscribers seeking for certainty of returns.
Stakeholder feedback
Most stakeholders were positive on the Commission’s intention to implement a price cap as
the airport operator arguably benefits the most from high passenger traffic growth at the airport.
Some stakeholders believe that the hybrid control is the most effective solution as it would
provide a cushion against low traffic in crisis scenarios and it would allow both the airport
operator and the airline to be incentivised to bring in traffic. Some believe that no single party
should be fully responsible for traffic risk and hence both airport and airlines should share
traffic risk and be compensated for any upside accordingly.
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Commission views
In making its decision, the Commission considered several factors such as:
a) the traffic forecasts made by MAHB have historically been in line with actual passenger
traffic, as explained further in the discussion on traffic forecasts on page 66;
b) incentive for performance, where MAHB is allowed to keep the revenues generated
should it exceed the targets set by the Commission. This is to promote commercial
decision-making and efficiency; and
c) the current operating environment where MAHB has been given the extension of its OA
tenure, and for MAHB to take on more responsibility for airport development.
The Commission thus maintains the view that the implementation of the RAB Framework for
2020 to 2022 should be through a price cap method.
The Commission, however, recognises the need to anticipate for cases of extreme events so
as to ensure Malaysia’s airport system is not unduly compromised for reasons beyond MAHB’s
control – as an illustration, a severe reduction in traffic as a consequence of war or
extraordinary meteorological conditions, which could result in MAHB generating significantly
lower revenues to the extent that it is not able to cover for necessary operating or capital
expenditures, and thereby compromise safety and service for the passengers. To mitigate this
risk, the Commission proposes that in the event that the actual number of passengers deviates
more than 10% from the forecast assumed in the price cap, there will be an opportunity for the
airport operator or airline to apply to the Commission to recalculate the price cap. The
difference between actual and forecasted passenger traffic will be measured on a cumulative
basis over the course of the price cap period.
The extreme events clause is based on similar practises and arrangement applied in the global
aviation industry, such as in Spain, European Union (Single Air Traffic Management System),
UK, Singapore and Ireland; the specific threshold varies between system. As such, the
Commission proposes to include an allowance for an extreme event, with a 10% threshold,
into the RAB Framework.
Form of till
The Commission had stated the merits of adopting a single till mechanism for the RAB
Framework in the October 2018 Consultation Paper. From its initial assessment, the
Commission had found that the lack of available data does not readily permit the ability for
allocation of costs and assets between the regulated aeronautical and non-aeronautical
operations, which would be a prerequisite under the dual till mechanism. The single till
mechanism is less complex and requires significantly less data than the dual till mechanism,
which considers only aeronautical costs and assets and hence requires an allocation of costs
and assets. Therefore, a move towards a more sophisticated hybrid or dual till in Malaysia
does not appear to be practical as a first step.
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Stakeholder feedback
Most stakeholders have written in to say that they are in agreement with the Commission’s
views. One stakeholder in particular agreed with the Commission that the dual till mechanism
would result in a highly complex arrangement and would require detailed data beyond what is
likely available presently.
Some stakeholders preferred a dual till mechanism as it is said to encourage innovation and
a better customer experience for non-aeronautical activities (such as F&B), retail, car park and
advertising) since the airport operator has the incentive to maximise revenues from these
sources and develop these facilities outside of the regulated asset base. Non-aeronautical
services are said to be competitive and should not be regulated, thereby incentivising the
airport operator to run the non-aeronautical services in a more competitive manner.
Commission views
Since the location of the non-aeronautical services are at the airport which effectively
ringfences the passengers within the airport perimeter and puts other retail competitors, such
as the high street shops and malls, at a significant distance, the Commission considers that
the argument that non-aeronautical services should not be considered within the RAB
Framework due to a competitive environment as not effective.
Although the Commission is cognisant of the increasing trend towards e-commerce and its
effects on an airport operator’s non-aeronautical revenues, the Commission assessed that the
airport operator should still be able to be incentivised to develop their non-aeronautical
offerings in order to compete effectively as a commercial airport and maximise profitability. In
addition, MAHB would still be able to obtain outperformance if it achieves non-aeronautical
revenues that are higher than the forecasts assumed in the framework.
Thus, the Commission has decided on a single till implementation for RP1.
Starting RAB
Stakeholder feedback
There was general consensus with the Commission’s definition of the starting RAB of RM8.4
billion (as at 31 December 2017, in reference to the October 2018 Consultation Paper),
although some stakeholders requested for further clarification on the composition of assets
and the list of key projects.
Some stakeholders, meanwhile, stated that the assets which were previously developed by
the GoM should also be included in the RAB Framework, which would more accurately reflect
the true asset base of MAHB airports in Malaysia.
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Commission views
The Commission’s position on the starting RAB is explained in more detail in Section 4.0 on
page 30. In essence, the Commission considers that the starting RAB of RM8.3 billion based
on the data as at 31 December 2018 is appropriate as this represents the asset base funded
by MAHB and is in line with the principles of the RAB Framework where the operator is allowed
to recover its costs.
The Commission takes note that significantly higher charges would result should MAHB be
compensated for assets that it did not spend on. There is a possibility of a sudden and
significant increase in charges if MAHB invests on top of a lower asset base, but such
investment would be subjected to further review and consultation ahead of RP2.
Regulatory Period
The Commission had proposed in the October 2018 Consultation Paper for the term of RP1
to be 3 years. Whilst the Regulatory Period is commonly set for 5 years, there are examples
of shorter regulatory periods being introduced in other jurisdictions especially during the initial
price cap process. For example, Civil Aviation Authority of Singapore started with an initial 2.5
years before moving into a 5-year regulatory period cycles. The shorter regulatory period at
the initial setting allows for an earlier second regulatory cycle to implement improvement
opportunities identified during the first regulatory cycle. This could therefore result in a more
improved RAB Framework over the long term from the perspective of the airport operator,
airport users and investors alike.
Stakeholder feedback
Almost all the stakeholders were in agreement with the RP1 duration of 3 years. Those who
disagreed stated that the duration should be 5 years to enable cost efficiencies and ensure
regulatory stability. Some stakeholders also felt that the timeline for the planned 3Q 2019
commencement was too aggressive.
In February 2019, MAHB wrote to the Commission in any event requesting for a deferment of
the effective date of the framework implementation to 1 January 2020.
Commission views
The Commission regards a shorter 3-year regulatory cycle for RP1 to be more beneficial for
the reasons stated above. Pursuant to the request by MAHB, the Commission had also agreed
to MAHB’s proposal for the deferment of the effective date of RP1 to 1 January 2020. Thus,
The Commission shall proceed with its plan for a 3-year regulatory cycle beginning 1 January
2020.
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Groupings of tariffs
The Commission had highlighted in the October 2018 Consultation Paper that the current
tariffs were formulated at a network level, as opposed to geographical or individual airport
level, with uniform tariffs set for all airports in Malaysia (for the PSC, landing and aircraft
parking fees). This is largely consistent with how the GoM had historically treated airport
aeronautical charges given the airport network structure in Malaysia.
The Commission had highlighted in October 2018 Consultation Paper that it wishes to move
to a tariff regime allowing for differentiated charges at different airports depending on service
levels and infrastructure provided. Pursuant to this objective, there are various approaches to
structuring the RAB in order to determine different price caps and therefore set differentiated
charges – for instance, by structuring the RABs by network, cluster or individual airport.
Structuring the RAB by geographical region involves calculating separate RABs for groups of
airports in accordance to their location. This creates an opportunity to have different RABs and
price caps for each OA, which themselves are being organised under the 4 different regions.
By structuring the RAB in this manner, each geographical cluster would be economically
feasible, with cross-subsidisation occurring amongst airports within a particular group only.
This subject is further discussed in Section 7.0.
Stakeholder feedback
Some stakeholders agreed with the proposed 4 geographic groupings and highlighted the
benefit of being structurally consistent with the new OAs currently being negotiated between
the GoM and MAHB. In addition, one stakeholder noted that the Sarawak cluster would require
subsidies to be viable and without which, PSC levels could be too high. Only the international
airports would be profitable, while the remaining domestic airports would be unprofitable and
would require cross-subsidisation within the cluster.
Some stakeholders disagreed with cross-subsidisation within geographic groupings as they
argued that different airports should be regulated individually, and they believe charges should
be based on size and facilities rather than geographic groupings. Should charges for
secondary airports be higher due to the low passenger volume, one stakeholder believes that
the GoM should pay subsidies to reduce this.
Commission views
The Commission takes note that the GoM is currently negotiating with MAHB for the current 2
OAs to be replaced with 4 new OAs based on geographic regions. The Commission is
therefore presently considering as a possible option for the RAB to be organised in accordance
with the 4 OAs (discussed further in Section 7.0). The Commission lays out other options in
Section 7.0 and highlights the pros and cons of each option and continues to seek feedback
from stakeholders on this particular matter before deciding on how the RAB should be
structured.
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Tariff setting
The Commission had stated in the October 2018 Consultation Paper that within an incentive-
based framework like the RAB, the airport operator can set its own structure and level of
charges provided that it is within the regulated price cap as set by the Commission. In other
words, MAHB in this case would be free to determine tariffs, with the Commission’s primary
regulatory concern is whether the implied regulated revenue per departing passenger is within
the price cap determined by the Commission.
In such a case, MAHB would also be free to propose new types of tariffs such as transfer PSC
or increasing the ratio of landing and aircraft parking revenues vis-à-vis PSC. The current ratio
of revenues generated by PSC and landing and aircraft parking fees based on MAHB’s 2018
financial performance is 81:18:1 (gross).
Stakeholder feedback
Most stakeholders agreed with the Commission that MAHB should be given the freedom to
charge different charges across different airports as per their business strategy, with most
agreeing with tariff differentiation based on airport sizes and facilities. For example, the PSC
could be lowered at specific tourist destinations to encourage tourism or raised at overcrowded
airports to combat congestion.
One stakeholder in particular strongly disagreed with the Commission that MAHB should be
given the freedom to charge different tariffs across different airports and requested for the
Commission to maintain the current weightage of PSC, landing and parking fees. Some
stakeholders also believe that airport development costs should not be funded by parking and
landing charges due to low service quality by the airport operator.
Some stakeholders agreed for an introduction of transfer PSC to reduce impact to PSC, though
almost all stakeholders disagreed with prefunding as discussed in the October 2018
Consultation Paper. Others highlighted that incentives should be non-discriminatory. Almost
all stakeholders emphasised on how increases in tariffs should consider the affordability of
users and the current economic climate vis-à-vis the Departure Levy.
Commission views
The Commission maintains its opinion that within an incentive-based framework like the RAB,
the airport operator should have freedom to set its own structure and level of charges provided
that it is within the regulated price cap as set by the Commission as the airport operator should
be incentivised to carry out a pricing strategy consistent with its BP.
The Commission retains its statutory right, however, to determine the tariffs itself if the set of
tariffs proposed by MAHB is deemed unreasonable by the Commission.
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User fees
User fees are paid by MAHB to the GoM for the right to operate the airports and provides the
GoM with a source of funding for airports’ capex. The Commission had previously stated that
it is likely to include user fees into the cost base.
Stakeholder feedback
Some stakeholders questioned whether the inclusion of user fees could be double counting
given that there is also a corresponding amortisation cost associated with the asset base
(which includes concession rights). Almost all stakeholders requested for more clarity on the
utilisation of the user fees and whether the fees have been reinvested back into the airports
industry.
Commission views
The user fees are defined contractually under the 2009 OA. User fees paid to the GoM are
part of the GoM’s revenues and not specifically ring-fenced for reinvestment back into airports
currently. Therefore, user fees are in effect an operating cost to MAHB, which can also be
argued to represent a proxy remuneration of the GoM assets (airport development capex) that
were historically not paid by MAHB. The arrangements between MAHB and the GoM are
determined by the OA. If airport aeronautical charges are not able to remunerate these costs,
then it could lead to underperformance impacting the financial stability of the airport operator.
As such, the Commission maintains its position to allow the recovery of user fees into the RAB
framework.
Capex responsibility
Stakeholder feedback
There are a number of feedback received on capex, as listed below:
a) some stakeholders questioned MAHB’s implementation capability and wanted more
involvement in approving the projects to be undertaken under the BP and CIP;
b) some proposed for only projects that will be commissioned for use to be included in RP1
while some others questioned whether the cost projections have included an efficiency
factor;
c) there was a suggestion for the Commission to consider the setting up of an ACC forum
to be held to discuss capex, as well as a clawback mechanism on non-delivery of
projects, while another requested for the Commission to include a monitoring
mechanism to avoid issues in deliverability; and
d) there was a concern that the significant capex programme may affect the QoS levels
delivered at the airports.
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Commission views
The Commission believes that moving forward, the default capex and funding responsibility
should lie with the airport operator. In addition, placing such responsibility with the airport
operator is in accordance with global practices, and results in a more efficient, disciplined and
cost-conscious airport operator, resulting in airports that are designed in accordance with
commercial and industry needs. This will be a change for MAHB which has not been operating
within such an environment as the OA signed with the GoM in 2009 due to the shared
responsibilities for capex and funding.
In tandem with this view, MAHB is planning to increase their proposed capex significantly due
to their transition from an asset-light airport operator to an operator that would be responsible
for both development and maintenance capex.
However, the Commission questions whether MAHB has the internal capability to implement
a significantly higher amount of capital expenditures than it has historically been used to. As
an illustration, MAHB implemented capital expenditures of RM200 to RM300 million per annum
in between 2014 and 2017, while in its BP and CIP submissions, MAHB proposes to implement
capital expenditures of approximately RM2 billion to 3 billion per annum in RP1. This is a
significant increase, and will require internal process, culture and mindset change in MAHB in
order to execute projects of such quantum. Should MAHB fail in executing those projects within
the timescale provided, it would result in airport users overpaying in terms of charges.
There is also a concern that MAHB may be requested to execute certain ad-hoc government
projects during RP1, and whether MAHB should bear the burden of funding these projects. If
the funding burden would indeed fall on MAHB, then another issue arises on whether capex
for these projects should be included in the RAB, whereby their inclusion would increase the
price cap and the associated tariffs.
WACC
Stakeholder feedback
There were no significant comments on the WACC apart from some stakeholders as outlined
below:
a) risk free rate and cost of debt: Should be more forward-looking rather than using
historical averages;
b) beta: Some argue that the beta should be taken from the more recent period (last 5
years) rather than 2009-2013 and that MAHB’s beta showed that the stock volatility was
driven by local Malaysian operating factors rather than foreign operations. Another
highlighted that MAHB’s loss-making overseas businesses have resulted in a higher
perception of risk and thus the Commission should use sectoral benchmarks instead;
c) gearing: Some argued that the debt to capital ratio should be based on market value
rather than book value, with the ratio proposed to be lower at 40-45% due to debt and
29
rating limitations while some agreed with the Commission on the proposed 60% notional
gearing; and
d) overall WACC: One stakeholder argued that the 9.0% to 11.0% nominal WACC range
proposed by the Commission was too low and could harm both debt and equity investors.
Commission views
The Commission’s views are outlined further in Section 4.0 on page 61.
Regulatory risk
Stakeholder feedback
Some stakeholders had written to the Commission to ask for the commitment from the
authorities to reduce regulatory risk and ensure investor protection. They argued that the
authorities should consider the protection of the investors’ rights as minority shareholders and
capital providers to airport operators and hence their interests must be considered in the
implementation of the RAB Framework. The Airport REIT, departure levy and OA renegotiation
were quoted as examples of regulatory risks.
Commission views
The Commission takes note and concurs with the stakeholder comments. The Commission
had outlined its views on how the full realisation of the benefits of the RAB Framework on page
19.
Adjustment mechanisms
The Commission would like to highlight that the price cap is calculated in nominal terms based
on MAHB’s submission. There will be no adjustments made for the actual inflation being
different to forecast inflation.
The only adjustment mechanism will be for the case where the actual regulated revenue per
departing passenger (based on audited figures) is different from the price cap.
The Commission will then adjust for an such differences in the next RP as described in Section
4.0. The differences usually stem from a different mix of traffic compared to those assumed in
the forecast (e.g. a different proportion of international vs domestic departing passengers
paying tariffs).
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REVIEW OF MAHB NOVEMBER 2018 SUBMISSION
On 30 November 2018, MAHB submitted a BP and CIP to the Commission, which consists of
historical data for the period of 2014 to 2017 and forecast data for the period of 2018 to 2022.
The data was provided by MAHB in the form of individual airport spreadsheets, to enable the
RAB Framework to be applied to a form of grouping of airports to be determined by the
Commission.
Between August 2017 to May 2019, the Commission conducted a total of 41 clarification
sessions with MAHB totaling 94 hours of engagements (via both face-to-face meetings and
conference calls) to discuss the content of the BP and CIP. The Commission undertook a
verification exercise, the outcome of which forms the basis of the proposed draft price cap. In
April 2019, the Commission was also provided with MAHB’s audited 2018 financial statements
and the actual traffic statistics. For the purposes of the RAB Framework verification and review
for RP1, the Commission has used the historical data for 2014 to 2018, the forecast data for
2019 and the forecast RP1 figures (2020 to 2022).
Opening RAB
The Commission has included all assets which MAHB has invested in and used to operate
airports in Malaysia including intangible assets, land and concession rights. These mainly
consist of MAHB’s investment in KUL-T2 and some other airport investments. The opening
asset base has been provided for each of MAHB’s airports.
The Commission is using a starting asset base that includes airport assets under MA Sepang
and MASB, the two airport operating subsidiaries. STOLports are excluded from the
calculation of the asset base due to the impending MA to be signed between MAHB and the
GoM. The Commission has also excluded assets held at overseas airports and ancillary
operations which are not used to operate airports. Current assets such as cash, inventories
and short-term investments are not included in the RAB.
As stated in the October 2018 Consultation Paper, these asset value estimates do not include
terminal infrastructure and other development capex on assets financed and developed by the
GoM. Therefore, the airport aeronautical charges calculated from the RAB Framework is
calculated on a smaller base compared to the total airport assets in Malaysia. However, MAHB
also pays the GoM user fees, which are an in effect a type of concession fee or proxy
remuneration paid to the GoM for the use of GoM’s airport assets.
The main components of MAHB’s asset base are categorised into building and structures,
infrastructure and operating equipment. It is based on the assets used for the provision of
aeronautical and related services and includes, under the chosen single till regime: all assets
used for aviation activities as well as commercial activities (e.g. runways, terminals, retail, car
parks, property used for these customers (offices), etc.). These will usually lie within the airport
perimeter boundary.
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As tabulated in Table 1, MAHB assets are distinguished between assets (excluding
concession rights and assets in the course of construction), concession rights and assets in
the course of construction4. As at 31 December 2018, the depreciated asset value is RM8.3
billion.
Values in
RM million
Assets
excluding
concession
rights and AICC
Concession
Rights AICC
Total
assets
Opening Balance 6,615.6 1,510.7 209.0 8,335.3
Additions 303.8 - 45.5 349.3
Disposals (5.9) - - (5.9)
Depreciation (311.2) (20.1) - (331.3)
Closing balance 6,602.4 1,490.5 254.5 8,347.4
Table 1 – MAHB assets as at 31 December 2018
Source: MAHB
MAHB Business Plan & key strategies
MAHB stated in its 2019-2022 BP that the Malaysian airport industry would need to address 4
key objectives in the immediate term. The industry needs to achieve higher growth and
performance by growing KUL’s prominence as a regional hub, expand airports’ capacity and
uplift quality of service. There is also a need to ensure competitive prices for the airlines that
take into account affordability for consumers. At the same time, there is a need to ensure that
airport operators maintain fair returns to encourage further investment into the airports system
whilst minimising subsidies required by the GoM.
Through the BP, MAHB aims to deliver 5 key strategic themes - becoming a best-in-class hub,
attaining world-class service levels, strengthening the non-aeronautical business, unlocking
potential through Aeropolis and expanding the international business. For the purposes of the
RAB Framework, the Commission will only review the BP relating to the domestic airports
sector. A snapshot of the BP, its strategic themes, burning platform issues, initiatives and
business model enablers are as listed below.
4 AICC, also known as Capital-in-Progress, represent assets which are being built or developed but not yet completed and available for use at the end of the financial year. Once completed they are transferred to asset categories and depreciated.
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* Pages refer to MAHB’s 2018 Annual Report
Figure 6 – MAHB BP
Source: MAHB
The Best in Class Hub strategic theme aims to strengthen Malaysia’s overall airport network
with KUL at its heart, contributing 60.5% of total passenger traffic in Malaysia (60.0 million
passengers out of total 99.0 million passengers in 2018). Other airports in MAHB’s network
are positioned as feeders for KUL’s traffic, while also taking steps to attract point-to-point traffic
for themselves. This is also in line with the MoT’s National Transport Master Plan, which
envisions KUL as the nation’s primary hub in a hub-and-spoke model airport system.
MAHB also aims to raise MAHB airports’ service levels to world-class standards in line with
aspirations to position KUL as a hub and MASB airports as secondary airports respectively.
Its initiatives are to meet the QoS regulations imposed by the Commission as well as ensuring
a customer-centric culture.
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Lastly, MAHB aims to strengthen its non-aeronautical businesses by conducting a commercial
reset strategy as well as establishing an e-commerce platform. Its initiatives include
commercial revenue enhancement, strengthening retail duty-free and enhancing the
commercial business at MASB airports respectively.
The financial impact of the BP and CIP were extracted and tabulated in the form of starting
and projected RAB and price cap levels for the whole Malaysian airport business as well as
individual geographic clusters as shown below.
Overall RAB and price caps for MAHB’s Malaysian airports business, based on MAHB
November 2018 submission
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 8,335.3 8,347.4 9,173.7 11,446.0 14,069.8
Capex 349.2 1,212.1 2,723.2 3,152.7 4,119.4
Disposals (5.5) - - - -
Depreciation (331.6) (385.8) (451.0) (528.9) (596.1)
RAB Closing balance 8,347.4 9,173.7 11,446.0 14,069.8 17,593.1
Operating costs 1,911.0 2,231.0 2,419.9 2,574.9 2,737.4
Depreciation 331.6 385.8 451.0 528.9 596.1
Return on capital (WACC) 1,167.8 1,226.5 1,443.4 1,786.1 2,216.4
Non-regulated aeronautical revenues (65.9) (66.4) (70.6) (75.3) (80.1)
Non-aeronautical revenues (1,163.7) (1,213.9) (1,294.0) (1,420.9) (1,494.8)
Regulated revenues 2,180.8 2,563.0 2,949.7 3,393.6 3,975.0
Departing passengers (thousands) 49,797.8 52,498.0 55,603.8 58,888.9 62,333.5
Price cap (RM) 43.8 48.8 53.0 57.6 63.8
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 2 – Overall RAB and price cap for all airports (MAHB November 2018)
Source: MAVCOM analysis, MAHB November 2018 submission
The MAHB BP and CIP submissions, updated for 2018 actual data and an amendment to the
user fee calculation, leads to an escalating level of regulated revenues over the forecast
period, which implies almost a doubling of tariffs would be required across the network to fund
this plan (from RM34.8 actual revenue per pax earned in 2018 to RM63.8 in 2022).
The implications to the clusters are contained in the subsequent 4 tables. Cluster RAB have
been calculated by applying consistent WACC across all clusters and allocating all allowable
HQ costs to KUL.
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RAB and price caps per cluster, based on MAHB November 2018 submission
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 7,317.1 7,277.6 7,705.9 9,307.3 10,665.1
Capex 242.1 767.8 2,002.3 1,825.0 2,993.5
Disposals 4.6 - - - -
Depreciation (286.2) (339.4) (400.9) (467.2) (519.8)
RAB Closing balance 7,277.6 7,705.9 9,307.3 10,665.1 13,138.8
Operating costs 1,385.0 1,635.8 1,787.1 1,879.3 2,001.8
Depreciation 286.2 339.4 400.9 467.2 519.8
Return on capital (WACC) 1,021.6 1,048.8 1,190.9 1,398.1 1,666.3
Non-regulated aeronautical revenues (50.8) (49.8) (52.2) (55.3) (59.0)
Non-aeronautical revenues (962.4) (994.3) (1,063.1) (1,175.8) (1,238.6)
Regulated revenues 1,679.7 1,980.0 2,263.6 2,513.4 2,890.3
Departing passengers (thousands) 30,241.1 30,655.9 32,603.2 34,661.0 36,818.4
Price cap (RM) 55.5 64.6 69.4 72.5 78.5
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 3 – Overall RAB and price cap for KUL (MAHB November 2018)
Source: MAVCOM analysis, MAHB November 2018 submission
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 757.1 781.8 1,020.5 1,536.8 2,330.5
Capex 62.6 271.0 551.9 838.0 527.4
Disposals (5.2) - - - -
Depreciation (32.6) (32.3) (35.6) (44.3) (56.7)
RAB Closing balance 781.8 1,020.5 1,536.8 2,330.5 2,801.2
Operating costs 243.2 272.9 293.1 326.5 344.3
Depreciation 32.6 32.3 35.6 44.3 56.7
Return on capital (WACC) 107.7 126.2 179.0 270.7 359.2
Non-regulated aeronautical revenues (6.0) (6.4) (6.7) (7.3) (7.7)
Non-aeronautical revenues (117.1) (136.5) (145.2) (155.4) (160.8)
Regulated revenues 260.4 288.5 355.7 478.8 591.7
Departing passengers (thousands) 8,258.9 8,794.8 9,318.0 9,873.9 10,456.7
Price cap (RM) 31.5 32.8 38.2 48.5 56.6
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 4 – Overall RAB and price cap for Peninsular (MAHB November 2018)
Source: MAVCOM analysis, MAHB November 2018 submission
35
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 174.6 179.4 245.5 292.0 486.9
Capex 14.8 74.5 54.9 204.3 318.7
Disposals (3.7) - - - -
Depreciation (6.3) (8.4) (8.4) (9.4) (9.6)
RAB Closing balance 179.4 245.5 292.0 486.9 795.9
Operating costs 126.9 152.3 158.7 172.1 183.1
Depreciation 6.3 8.4 8.4 9.4 9.6
Return on capital (WACC) 24.8 29.7 37.6 54.5 89.8
Non-regulated aeronautical revenues (4.3) (4.2) (5.0) (5.2) (5.4)
Non-aeronautical revenues (30.6) (28.4) (28.9) (29.6) (30.7)
Regulated revenues 123.1 157.9 170.8 201.1 246.4
Departing passengers (thousands) 5,338.0 6,145.7 6,440.4 6,752.0 7,079.2
Price cap (RM) 23.1 25.7 26.5 29.8 34.8
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 5 – Overall RAB and price cap for Sarawak (MAHB November 2018)
Source: MAVCOM analysis, MAHB November 2018 submission
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 86.5 108.6 201.8 309.9 587.2
Capex 29.7 98.9 114.2 285.4 279.8
Disposals (1.2) - - - -
Depreciation (6.5) (5.6) (6.1) (8.1) (9.9)
RAB Closing balance 108.6 201.8 309.9 587.2 857.1
Operating costs 155.9 170.0 181.0 197.0 208.2
Depreciation 6.5 5.6 6.1 8.1 9.9
Return on capital (WACC) 13.7 21.7 35.8 62.8 101.1
Non-regulated aeronautical revenues (4.8) (6.0) (6.6) (7.5) (7.9)
Non-aeronautical revenues (53.6) (54.7) (56.7) (60.1) (64.7)
Regulated revenues 117.6 136.7 159.6 200.3 246.6
Departing passengers (thousands) 5,959.7 6,901.6 7,242.1 7,601.9 7,979.2
Price cap (RM) 19.7 19.8 22.0 26.3 30.9
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 6 – Overall RAB and price cap for Sabah (MAHB November 2018)
Source: MAVCOM analysis, MAHB November 2018 submission
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Capital expenditure
MAHB November 2018 CIP summary
Through its BP and CIP, MAHB plans to focus on 3 key strategies: becoming a best-in-class
hub, attaining world-class service levels and strengthening the non-aeronautical business.
Through the new OAs5, MAHB is planning to depart from its traditional business model of an
asset-light operator which would only be responsible for maintenance capex and not
development capex. In this regard, the Commission is of the opinion that even though MAHB
was traditionally an operator without any default developer duty, it was still MAHB’s
responsibility to identify the airports’ development needs and operate the airports in
accordance with the appropriate standards.
MAHB highlighted that the estimates for Development Capex submitted in November 2018
were preliminary and subject to further in-depth consultation and studies that were planned to
be carried out in the first half of 2019. The estimates for Maintenance Capex meanwhile were
developed on a bottom up project by project basis based on a combination of historical and
comparable benchmarks of unit costs, asset replacement values, vendor quotations, tender
documents and other methods.
The total capex in MAHB’s proposed CIP is RM11.2 billion for the 2019-2022 period, consisting
of RM7.1 billion for KUL, RM3.6 billion for MASB airports while RM0.5 billion is attributable to
corporate capex6. However, the Commission were not able to reconcile the total capex stated
in the CIP with the detailed capex spreadsheets furnished by MAHB, with the latter providing
a total capex of RM10.8 billion instead (of which RM10.0 billion is for RP1 period of 2020-
2022).
MAHB identifies the need for capital investment based on the asset‘s useful life, asset
performance, regulatory requirement, spare parts availability, provision of technical support
and alternative options. For replacement capex, the asset replacement master plan will be
triggered when the asset is reaching its predefined useful life. The condition and performance
of the asset will first be assessed to determine the possibility of extension of asset’s useful life.
In the event where extension is not recommended, the asset will be replaced at its end of
useful life and the timeline of the replacement programme depends on the complexity of this
programme.
MAHB highlighted that the scale and pace of the capex programme will require a significant
ramp up in terms of execution capabilities. While over the long term, MAHB acknowledged the
requirement to build a robust in-house capex planning and delivery team, given the
accelerated execution timeframe for many critical projects, it is likely that MAHB will need to
secure external technical expertise or partners to deliver on the investment programme for
RP1.
5 Targeted to be signed in 2019. 6 80% allocated to regulated business and included in KUL capex.
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Proposed adjustments to capex allowed into the RAB Framework
The Commission embarked on a review process of the CIP in December 2018, shortly after
the BP and CIP were submitted. As part of the evaluation, the Commission reviewed the
current capacity and layout of the airports, forecast traffic growth, peak hour passenger
demand, project costs, demand by airlines, timing and the necessity of each project. In
addition, the Commission considered whether MAHB has fully exhausted other possibilities
such as implementing operational efficiencies, or alternative, less capital-intensive solutions
(such as internal reconfiguration), before planning its capital investment.
In reviewing the proposed projects, the Commission considers the following key target
outcomes:
a) the airports must be able to provide sufficient future capacity to its users (airlines, ground
handlers, passengers) for daily operations;
b) the airport infrastructure is provided at good levels of service;
c) the cost efficiency of the infrastructure; and
d) the operational efficiency of the airports’ infrastructure and services.
The annual design capacity refers to the nominal capacity of the airport’s facilities to process
the aggregate passengers per annum. On the other hand, the peak hour capacity refers to the
number of passengers being processed by the airport during the peak hour which allows for
development of design requirements.
Proposed monitoring process to monitor project execution
The Commission takes note that MAHB is expecting to significantly increase the capex across
the network from historic levels of RM200 million to RM300 million per annum to a RP1 CIP
which is in the range of RM1 billion to RM2 billion per annum. A number of stakeholders have
also raised concerns about MAHB’s ability to deliver the development and maintenance capex
programme, particularly with large projects such as BHS, TTS and commercial reset programs
to be executed over a period of 3 years.
The Commission recognises the risk of MAHB not being able to plan and execute the delivery
of projects proposed in its BP and CIP. However, the Commission also takes note of the
investment need due to the ageing facilities, increasing congestion and the need for large-to-
medium scale refresh programmes at many of MAHB’s airports. It may also be appropriate to
provide MAHB with the ecosystem and funding mechanism needed to encourage it to take the
required steps to deliver the capital programme that is needed for the airports, such as building
up internal execution capacity and enhancing capital delivery.
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Options being considered by the Commission include:
a) identification of priority projects;
b) monitoring levels of expenditure and progress on delivery of projects on a periodic basis;
c) high-level reactive monitoring in response to stakeholder concerns raised on delayed
and inappropriately scoped projects; and
d) undertake an ex-post review of the level of actual expenditure compared to the plan
underpinning the price cap.
The Commission intends to monitor MAHB’s implementation of its capital expenditure plan
through the setting of interim way points. The detailed solution needs to recognise the trade-
off between the costs of monitoring and the need to ensure the timely and cost-effective
implementation of the capital programme, which underpins the regulated tariffs to be paid by
users for RP1.
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Key projects – before & after verification
MAHB submitted a total capex of RM11.2 billion for the 2019 to 2022 period, of which RM10.0
billion is for RP1 (2020-2022). Overall, the adjustments the Commission is proposing to make
(by assessing the cost estimates and adjusting the timelines) are as below:
Total capex for RP1
(RM million)
MAHB’s
November 2018 CIP
MAVCOM
draft base case revision
KUL 7,080.6 3,290.5
BKI 398.5 228.0
PEN 890.9 1,045.2
KCH 370.9 164.1
LGK 342.0 233.7
SZB 146.8 6.4
TWU 98.3 0.4
SBW 64.6 0.5
SDK 85.9 7.3
KBR 519.7 12.6
Total * 9,998.4 4,988.7
* The total includes KBR and SDK, where development capex will be funded by the GoM
Totals may not add up due to capex at smaller airports not listed above and rounding of numbers
The GoM has directed MAHB to fund the following projects totaling RM103m: ATC and meteorology
projects in PEN; ATC system update in SZB
Table 7 – Summary of proposed capex
Source: MAVCOM analysis, MAHB
KUL – both terminals
KUL is currently operating at 86% of the combined capacity of 70 million pax per annum (2018
traffic: 60.0 million pax). The KUL-T1 has reached 112% of its annual design capacity of 25
million pax per annum (2018: 28.1 million pax) while KUL-T2 is operating at 71% of the annual
capacity of 45 million pax per annum (2018: 31.9 million pax). However, on a peak hour pax
basis, both terminals are operating below capacity. For KUL-T1, MAHB is projecting a peak
hour passenger of 6,661 pax in 2019 compared to the design peak hour capacity of 8,909 pax
while for KUL-T2, MAHB is projecting 6,669 pax in 2019 compared to design peak hour
capacity of 11,371 pax. The Commission takes note that MAHB is projecting that the peak
hour passenger will not breach designed peak passenger per hour capacity throughout RP1,
with a peak hour passenger projected for 7,734 at KUL-T1 and 8,249 at KUL-T2.
MAHB proposed several projects within the regulatory period to increase the capacity of all
airport areas. This included increasing aircraft stand capacity with new satellite buildings for
each terminal, expanded and reconfigured terminal areas, passenger connections between
terminals, major refurbishment programmes for the baggage handling systems, aerotrain and
airfield pavement, expanded short-term car park and various operational and corporate
initiatives.
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Overall, the Commission assessed that there is no requirement to take on the planned
expansion of a new satellite building, with the expansion to both the main terminal and piers
allowed to proceed only after optimisation projects have been examined, in line with the
findings from IATA optimisation study commissioned by MAHB in 2018. If MAHB is able to
process 400,000 passengers per stand, the Commission assessed that KUL-T1 will be able
to cater for up to 34 million pax per annum by utilising more remote stands and adding new
bus lounges. The Commission is therefore proposing to allow the proposed expenses for
optimisation whilst deferring a few large development capex projects but allowing for a
significant portion of maintenance capex such as the BHS, TTS and runway pavement
programs. These projects will also be required to undergo consultation, both by MAHB and
also at the consultation sessions to be organised by the Commission.
On the airfield, the Commission notes that though the aircraft movements per hour at the
airport are close to the maximum capacity of 84 movements per hour, the Commission
assessed that the airfield capacity can be further improved given that 84 movements per hour
are not high for a 3 wide-spaced parallel runway system7. The peak movements anticipated in
2019 are 42 and 40 for KUL-T1 and KUL-T2 respectively. However, given that MAHB is
projecting peak hour aircraft movements of 101 in 2023, the Commission is allowing capital
for MAHB’s proposed projects to improve runway efficiencies.
The Commission is proposing to allow for a capital allowance for MAHB to conduct further
master planning and development studies in RP1, especially given the potential long-term
need to enhance airside connectivity and transfer service between the two terminals to
maximise KUL’s operating efficiency as a multi-terminal hub. However, the Commission also
notes that MAHB would have to set out a comprehensive argument on why KUL should have
these facilities to meet airline, passenger and national interest.
KUL Project description
Development Capex proposed by MAHB
Interim solution Conversion/Renovate the existing ramp office (Ground Floor) at CP to cater
new bus departure lounges (left & right).
MTB right/left
expansion
Expansion of MTB in both right and left directions
Link bridge right/left
expansion
Expansion of the link bridge (right/left) to accommodate more international
passengers
Satellite B Construction of new satellite B (4 floors)
Runway 2 western
parallel taxiway
New western parallel taxiway at Runway 2
Multi-storey car
park
New multi-storey car park (2 blocks)
Inter-terminal
connections
Airside Inter-Terminal Transfer between the two terminals (TTS, BHS etc).
Execution to be deferred but planning can commence during RP1. Planning
should be coordinated with the Satellite B project. As an interim solution, to
consider using buses and trucks for airside connectivity.
7 A single runway airport could achieve up to 55 movements per hour while a two-runway airport system could achieve up to 80 movements per hour subject to airspace capacity management constraints.
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KUL Project description
KUL-T2 Pier
reconfiguration
Pier reconfiguration to accommodate more passengers
KUL-T2 terminal
building expansion
Expansion to KUL-T2 MTB and Satellite to accommodate more passengers
Maintenance Capex proposed by MAHB
Baggage flows Replacement of life-expired major systems such as sorting, IT, transporting
and screening equipment
Aerotrain
replacement
Replacement of existing aerotrain that serves as the main transportation
mode in ferrying passengers at KUL MTB and satellite
Airport
management
centre (AMC)
Integrating all subcentres and implementation of Airport Collaborative
Decision Making (ACDM)
Taxiway loop Construction of loop taxiway at Runway 2 14R and associated works
Pavement repairs Refurbishment of runway, taxiway and apron system
Building facility
maintenance
Upgrade of the 20-year old KUL-T1 including toilet upgrades, roof repairs
and floor upgrades
Commercial reset Upgrading of commercial retail lots and product offerings
Terminal ambience Airport beautification and interior makeover
Big data analytics Big data analytics and Internet Of Things (IOT) system implementation to
manage passenger flow
Navigation Improving wayfinding
Security processing Upgrading of security checkpoints
CCTV Refresh of CCTV technology and perimeter intrusion system
Fire safety Fire safety system enhancement
AGL Upgrade of AGL
MAHB Rebranding Corporate rebranding
Corporate office
expansion
Revamp of existing office and construction of new office due to capacity
constraints
SAP system Implementation of SAP GRC Access Control
Minor Repex Minor Repex allowance (based on benchmark)
Projects proposed by the Commission
Master planning Instigate a masterplan refresh for KUL
PBB replacement Commence PBB replacement program at KUL
Terminal
optimisations
Implement projects recommended by IATA for terminal optimisations
Table 8 – List of proposed projects at KUL
Source: MAVCOM analysis, MAHB
BKI
BKI is currently operating at 89% of the design capacity of 9.0 million pax per annum (2018
traffic: 8.6 million pax) and this is projected to be breached in 2019. However, on a peak hour
passenger basis, the airport is still operating below capacity (projected at 2,485 pax compared
to design peak passenger per hour of 3,200 pax). MAHB is also not projecting for peak
passenger per hour to exceed design capacity throughout RP1, with the peak hour passenger
for 2022 projected at 2,881. However, stand capacity could be considered as full, with only 19
stands and 474,000 passengers handled each stand per year.
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For BKI, MAHB’s initial capex plan as per its November 2018 submission includes, among
others, expansion of the MTB, pier expansion and construction of multi-storey car park. MAHB
has also proposed maintenance capex items such as AGL, BHS, EPS, pavement and PBB
upgrades.
After its review, the Commission is proposing to allow the MTB expansion (Phase 1) and pier
expansion to be implemented only after operational efficiencies have been identified and
implemented, subject to consultation with airlines. Further master planning and development
studies can be conducted while the design and construction for expansion can be deferred
until the next RP. The Commission is also allowing all of the maintenance capex projects such
as on the AGL, BHS and pavement upgrades. The Commission, on the basis of MAHB’s
capacity assessment, concurs that development of a new multi-storey car park should
proceed.
For the airfield, MAHB has projected that the runway capacity of 26 movements per hour will
be breached in 2023. The Commission assessed that the available infrastructure should be
able to cater for more than that given there is a full parallel taxiway and 2 RET in both
directions.
BKI Project description
Development Capex proposed by MAHB
MTB left
expansion
Phase 1 upgrading and expansion of BKI - MTB left expansion, pier expansion,
new multi-storey car park
Pier expansion Pier expansion including new PBB, VDGS and new aircraft stands
Multi-storey car
park
New multi-storey car park to accommodate more capacity
Maintenance Capex proposed by MAHB
AGL Upgrading and maintenance works for AGL
BHS upgrade Upgrading works for BHS as it is more than 10 years old – replacement of drive
motor, roller/support bearing, link to Energy Monitoring System etc.
EPS upgrade Replacement of apron floodlights
Pavement Reconstruction and resurfacing of pavement
PBB upgrade Upgrade of PBB, VDGS and refurbishment of current PBB
Terminal
building upgrade
Upgrade of terminal building – public announcement system, toilet refurbishment
etc.
Others Digital interactive directory, digital standee, repainting works
Table 9 – List of proposed projects at BKI
Source: MAVCOM analysis, MAHB
PEN
The Commission concurs that there is an urgent need to expand PEN. It is currently operating
at 120% of the design capacity of 6.5 million pax per annum (2018 traffic: 7.8 million pax) and
this is projected to grow to 9.7 million in 2022. On a peak hour passenger basis, the airport is
projected to breach its capacity in 2020 (projected at 2,540 pax compared to design peak
passenger per hour of 2,553 pax). Stand capacity is also essentially at reasonable capacity,
with only 16 stands and 405,000 passengers handled each stand per year. The Commission
43
notes that MAHB has commenced projects to provide short-term interim solutions to improve
traffic flow, overall layout and reduce safety risks, such as enlarging the inbound immigration
area. The Commission is also aware that MAHB has commenced plans for expanding the
airport to 12 million pax per annum and has initiated airport user consultations.
For PEN, MAHB’s initial capex plan as per its November 2018 submission include, amongst
others, terminal extension, apron extension, BHS upgrade, provision of additional PBBs and
construction of multi-storey car park. For the maintenance capex items, MAHB has proposed
upgrades to be done for the terminal building, AGL, EPS, BHS, pavement and PBB.
MAHB was not able to send any data on the breakdown of the proposed PEN capex due to
the early stages of procurement and design process. Therefore, the Commission had to
conduct a bottom-up review, with cost estimates being derived as per the project descriptions.
After its review, the Commission is proposing to allow the terminal expansion and apron
expansion to proceed, subject to consultation. However, the Commission proposes deferment
of some contact stands construction. The Commission considers that, given MAHB will now
be in control of the timeline and funding, expansion based on incremental stages should be
further considered. The Commission would welcome stakeholders’ feedback on this
consideration. The Commission is also allowing all of the maintenance capex projects.
For the airfield, MAHB has projected that the runway capacity of twenty (20) movements per
hour will be breached in 2021 at 21 movements per hour, increasing to 24 in 2022. The
Commission understands that the airspace management is a key capacity constraint due to
the nearby Butterworth military airport. There is a risk that the development program at PEN
will not be realised due to runway capacity constraints.
PEN Project description
Development Capex proposed by MAHB
Terminal
extension
Additional floor area for the terminal and contact pier to cater for international
wing
BHS Upgrade of BHS
Apron extension Expansion of aircraft parking apron
PBB Additions of PBB
Car park Construction of multi-storey car park
Enabling works Enabling works – ATC, AFRS, MET, GA, apron
Maintenance Capex proposed by MAHB
AGL Upgrading and maintenance works for AGL
BHS upgrade Supply, Install, testing and commissioning BHS high level control (HLC) at PEN
EPS upgrade Replacement of apron floodlights
Pavement Reconstruction and resurfacing of pavement
PBB upgrade Upgrade of PBB and replacement of VDGS
Terminal
building upgrade
Upgrade of terminal building – public announcement system, toilet refurbishment
etc.
Others SITC of FIDS hardware and system, signages, GAS
Table 10 – List of proposed projects at PEN
Source: MAVCOM analysis, MAHB
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KCH
KCH is currently operating at 105% of the design capacity of 5.3 million pax per annum (2018
traffic: 5.6 million pax). However, on a peak hour passenger basis, the airport is still operating
below capacity (projected at 1,868 pax in 2019 compared to the design peak passenger per
hour of 2,000 pax). MAHB is projecting for peak passenger per hour to exceed design capacity
in 2021. Stand capacity is not observed to be at capacity, with 9 contacts stands and up to 7
gates being used at peak times. There are 3 remote bays which can also be used.
MAHB proposed development capex projects to expand the terminal, pier and apron as well
as install new ILHBS, multi-storey car park, and relocate the cargo and other facilities.
Maintenance capex was identified to achieve airfield compliance for AGL and pavement works
as well as refurbish BHS, replace PBBs, and replace dilapidated electrical equipment. Repair
and improvement of the terminal building was also identified.
After its review, the Commission is proposing to defer construction of the terminal expansion
and allow apron expansion to proceed only in stages, subject to stakeholder consultation. A
more efficient ratio of 70:30 ratio for contact stands to remote stands is recommended, in line
with global practice. The Commission is also allowing most of the maintenance capex projects
such as on the AGL, BHS and pavement upgrades.
For the airfield, MAHB has projected that the runway capacity of 30 movements per hour and
it will not be breached throughout RP1, growing to 21 movements in 2022. As such, there is
no runway capacity issue at KCH.
KCH Project description
Development Capex proposed by MAHB
Terminal
extension
Additional floor area for the terminal and contact pier
BHS Upgrade to Inline BHS
Apron extension Expansion of existing aircraft parking apron and associated works
PBB Additions of PBB
Car park Construction of multi-storey car park
Cargo relocation Relocation of existing cargo, maintenance and catering facilities
Maintenance Capex proposed by MAHB
AGL Upgrading and maintenance works for AGL
BHS upgrade Refurbishment of Baggage handling system
EPS upgrade Replacement of the CCR, new cable for high mast lighting, main switchboard etc
Pavement Reconstruction and resurfacing of pavement
PBB upgrade Upgrade of PBB
Terminal
building upgrade
Upgrade of terminal building – toilets refurbishment of cooling towers etc
Others other projects involved include flood light at car park, digital signages, repainting
works and few replacement programs like signages
Table 11 – List of proposed projects at KCH
Source: MAVCOM analysis, MAHB
45
Langkawi (LGK)
LGK is currently operating at 68% of the expanded design capacity of 4.0 million pax per
annum (2018 traffic: 2.7 million pax), after the completion of its expansion in 2018. However,
on a peak hour passenger basis, the airport is operating above its design peak hour capacity
of 1,200 pax (projected at 1,252 pax in 2019) and there is congestion at processing areas. The
airport has plenty of stand capacity as it has 15 aircraft stands at the airport (and no
aerobridges).
MAHB identified development capex to relieve the congestion through terminal expansion,
stand reconfiguration and providing new PBBs and car parking facilities. Maintenance capex
was identified for upgrade of AGL fittings, runway resurfacing and upgrading various terminal
facilities.
After its review, the Commission is proposing to allow the terminal expansion, which will target
to increase the critical processing areas and allow for optimisation projects, subject to
consultation. However, the Commission is proposing to defer the proposed addition of a
second floor and PBBs as it was found that operational and procedural processes should be
reasonably able to resolve the lack of separation for international and domestic passengers in
the short and medium term. The Commission is allowing most of the maintenance capex
projects such as on the AGL and pavement upgrades.
For the airfield, MAHB has projected that the runway capacity of 10 movements per hour will
be breached in 2019 (12 in 2022). As such, there is a runway capacity issue at LGK. The
Commission assessed that the available infrastructure should be able to cater for more than
10 movements per hour given the current infrastructure.
LGK Project description
Development Capex proposed by MAHB
Terminal
extension
Expansion for processing areas including construction of new floor and PBBs
Aircraft stand
reconfiguration
To accommodate new contact stands and PBBs
PBB Additions of PBB
Car park Construction of new car park
Maintenance Capex proposed by MAHB
AGL Upgrading and maintenance works for AGL
Pavement Reconstruction and resurfacing of pavement
Terminal
building upgrade
Upgrade of terminal building – new safety line for roof access, aluminium
composite cladding, PA system, refurbishment of toilets for staff/passenger and
the replacement of chillers
Others Other upgrading works include security fencing, construction of new schedule
waste storage, offices, and the replacement program for X-rays
Projects proposed by the Commission
Master planning Instigate a masterplan refresh for LGK
Table 12 – List of proposed projects at LGK
Source: MAVCOM analysis, MAHB
46
SZB
The Commission concurs that there is a need to optimise and alleviate the congestion at SZB.
SZB is currently operating at 133% of the design capacity of 1.5 million pax per annum (2018
traffic: 2.0 million pax), though this has been declining over the last few years and the urgency
to expand has somewhat subsided. On a peak hour passenger basis, the airport is operating
above its design peak hour capacity of 660 pax (projected at 737 pax in 2019) and there is
congestion at processing areas. The airport has limited stand capacity as it has 11 aircraft
stands handling 265,000 passengers annually per stand while the peak aircraft movements
per hour forecast is 17 in 2019.
Substantial development capex was identified by MAHB in its regulatory submission. This
included refurbishment and expansion of Terminal 3, including a new departure and arrivals
facility and associated apron and stands, demolition of Terminal 2. Installation of a new ILHBS
was also included.
After its review, the Commission is proposing to defer the terminal expansion but allow for
optimisation projects through Minor Repex projects. It is thought that monies should be
invested which will target and increase in the critical processing areas. Given the declining
passenger numbers such optimisation should be subject to consultation. For example, the
existing international gate lounge could be converted to a swing gate facility given there are
limited international flights. There is also an opportunity to repurpose the existing international
duty-free offering to mitigate constraints in the passenger screening area.
For the airfield, MAHB has projected that the runway capacity of 24 movements per hour will
be breached only after 2023 (17 movements in 2019 and 22 in 2022). As such, there is no
runway capacity issue at SZB. The Commission assessed that the available infrastructure
should be able to cater for more than 24 movements per hour given the current infrastructure.
SZB Project description
Development Capex proposed by MAHB
T2 demolition Demolition of T2 and development of temp car park
T3
refurbishment
T3 refurbishment, expansion and new domestic B
Lounge upgrade Upgrade and refurbishment of existing lounge
New ILHBS Installation of new ILHBS
Terminal
expansion
Terminal expansion to increase processing areas and increase capacity
Apron extension Extension of apron area
Projects proposed by the Commission
Minor Repex Minor Repex allowance (based on benchmark)
Table 13 – List of proposed projects at SZB
Source: MAVCOM analysis, MAHB
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TWU
TWU is currently operating at 109% of the design capacity of 1.5 million pax per annum (2018
traffic: 1.64 million pax). On a peak hour passenger basis, the airport is operating above its
design peak hour capacity of 580 pax (projected at 896 pax in 2019) and there is some
congestion at processing areas. The airport has limited stand capacity as it has 6 aircraft
stands (2 PBBs; 4 remote bays) while the peak aircraft movements per hour forecast is 8 in
2019 (growing to 10 in 2022).
MAHB proposed to increase the terminal capacity to 2.5 million pax per annum through a
terminal reconfiguration and modernisation project with new check-in counters and ILHBS.
Airfield expansion was identified through increasing the apron and additional PBBs.
After its review, the Commission is proposing to allow for optimisation projects which will target
to increase the critical processing areas, subject to stakeholder consultation. The Commission
is proposing to defer the additional two PBBs as they are not required for improved efficiency
of the airport (MAHB could build more remote bays instead since airlines such as AirAsia prefer
to use walk-out / remote stands) and also deferring the requirement for code E aircraft stand
(which requires more justification of its business case). Most of the maintenance capex
projects will be allowed although the upgrade of the BHS to ECAC Standard 3 is only required
if the airport is increasing international traffic.
For the airfield, MAHB has projected that the runway capacity of 10 movements per hour will
be breached only after 2023 (8 movements in 2019 and 10 in 2022). As such, there is no
urgent runway capacity issue at TWU. The Commission assessed that the available
infrastructure should be able to cater for more than 10 movements per hour given the current
infrastructure.
TWU Project description
Development Capex proposed by MAHB
Terminal
expansion
Expansion of terminal and upgrade to air-conditioned terminal
New check-in
counters
New check-in counters
ILBHS New ILBHS with dedicated international and domestic carousel
Apron
expansion
Expansion of parking apron to accommodate additional parking stands
Projects proposed by the Commission
Minor repex Minor Repex allowance (based on benchmark)
Table 14 – List of proposed projects at TWU
Source: MAVCOM analysis, MAHB
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Sibu (SBW)
SBW is currently operating at 88% of the design capacity of 1.8 million pax per annum (2018
traffic: 1.6 million pax). On a peak hour passenger basis, the airport is operating above its
design peak hour capacity of 900 pax (projected at 919 pax in 2019).
With the above design peak hour capacity, the area per pax is 15m2 which is below IATA LoS
optimum levels. MAHB proposed to expand and upgrade the existing terminal with
development capex to achieve 2.8 million pax per annum. An additional car park and ILHBS
was also proposed. However, the expanded functional area with the projected capacity will
result in a decline to the area per pax in the long-term. Overall, the Commission proposes to
defer the terminal and car park expansion subject to Masterplan findings and consultation.
For the airfield, MAHB has projected that the runway capacity of 20 movements per hour which
is anticipated to not be breached during RP1 (2019: 9). Although the airfield does not currently
have a parallel taxiway and it may be difficult to achieve the capacity of 20 movements per
hour, the Commission assessed that there is no urgent runway capacity issue at SBW.
SBW Project description
Development Capex proposed by MAHB
Additional car
park
Expansion of car park
Terminal
expansion
Expansion and upgrade of terminal
New ILBHS New ILBHS
Projects proposed by the Commission
Minor repex Minor Repex allowance (based on benchmark)
Table 15 – List of proposed projects at SBW
Source: MAVCOM analysis, MAHB
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Operating costs & drivers
As part of the BP, MAHB submitted operating cost assumptions for the forecast period (2018
till 2022). The Commission has reviewed the submission, focusing on the 5 international
airports - KUL, PEN, LGK, BKI, KCH as well as overall trends for the rest of the 16 domestic
airports. The analysis undertaken included:
a) comparison of MAHB’s projections in terms of real growth trends against the historical
data (2015-2017) as well as a comparison between the Malaysian airports analysed;
b) comparison of the performance of MAHB airports against regional airport comparators;
and
c) selective bottom-up modelling.
Overall, the Commission found that the operating costs projected over the first RP1 to be
reasonable when reviewed against historical trends and regional benchmarks. The operating
costs8 is expected to grow by 5.6% per annum from 2017 to 2022, which is lower than the
historical growth of 6.6% per annum from 2014 to 2017.
The airports used in the benchmarking include 12 regional airports or national networks
reflecting data for 7 Asian nations: Vietnam, Indonesia, Thailand, India, Singapore, Hong Kong
and The Philippines. The analysis was undertaken in real 2017 prices to allow trends in
underlying parameters to be analysed.
The outcome of this review is provided in the following sections.
Staff costs
The Commission found that MAHB is projecting a significant increase in staff numbers at KUL
for the 2018 to 2022 period driven by material increases in the following departments: AVSEC
(+412), Operations (covering a range of functions but explained by MAHB as resulting from
the new QoS mechanism) (+182), Engineering (+66) and smaller increases in AFRS, Support
and Commercial (+21). In total, MAHB is projecting to increase its staff force by a total of 681
staff from 3,773 (2017) to 4,454 (2022) which translates into 18% growth (or 317 for RP1
period). The increases in staff at other MAHB airports were less significant (+209 or 9%
growth), mainly focused on Aviation Security, AFRS and Engineering functions.
For KUL, the Commission noted that the staff number increments are high in relation to the
expected growth in traffic and the fact that no significant terminal expansion is being planned.
The staff level is expected to grow by 3.5% per annum from 2017 to 2022 compared to a -
2.3% reduction per annum from 2014 to 2017 (which were attributed to efficiency
improvements). The limited staff increments expected at other Malaysian airports are
considered to be more reasonable and appropriate (1.4% per annum compared to -1.5%
historically, which can also be attributed to efficiency improvements).
8 Excluding user fees and repair & maintenance expenditure.
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The Commission has built a bottom up estimate of the level of staff that would be justified by
the level of change in activity at the airport (passenger growth, new terminal area, commercial
revenue growth) forecast by MAHB by using the following elasticity assumptions:
Department Value Driver
AFRS 0.5 Passenger
AVSEC 0.5 Passenger
Car Park Management 0.6 Commercial Revenue
Commercial 0.6 Commercial Revenue
Engineering 0.6 Terminal area
GM's Office 0.6 Commercial Revenue
Operations 0.5 Passenger
Support 0.2 Passenger
Table 16 – Elasticity assumptions for staff number estimates
Source: MAVCOM analysis
This results in an estimated increment in staff numbers of 394 as compared to the 681
forecasted by MAHB for KUL for the 2018 to 2022 period.
However, MAHB is projecting low salary cost escalation assumptions. There is no real growth
in salaries projected between 2017 and 2022 which seems ambitious given that salaries are
expected to keep growing in real terms in Malaysia by 2% to 3% per annum based on a recent
industry report9. This is also in clear contrast with the trend observed in recent years when
salaries increased by around 3% to 5% per annum in real terms in the Malaysian economy10.
Following discussions with MAHB, the Commission understands that this forecast is driven by
a change in the mix of staff (lower wage staff replacing relatively higher wage staff) and also
reflects productivity improvements meaning that on average the expected cost per staff
member is not growing in real terms. MAHB has also recently highlighted that 95% of the
additional AVSEC hiring (in the 2019 to 2022 period) is attributed to National Civil Aviation
Security Programme (“NCASP”) as required by the Civil Aviation (Security) Regulations 2019
(“CASR2019”) under CAAM. As such, the Commission is keen to hear feedback from
stakeholders in this area before making a final adjustment on staff increments.
Staff numbers and levels are difficult to benchmark across other regional airports due to
different operating models (outsourcing vs insourcing). The Commission has undertaken
benchmarking on a staff cost per passenger and passengers per FTE basis using the sample
of airports described above. While recognising the limitations of the analysis, the Commission
found that KUL falls towards the lower quartile of both measures. For the other larger airports
9 https://www.theedgemarkets.com/article/malaysia-see-steady-salary-growth-2019 10 Salaries & Wages survey reports (2015-2017), Department of Statistics of Malaysia
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within MAHB’s network, the Commission observed that these airports fall in the middle of the
group for staff costs passenger and in the lower quartile for passengers per FTE.
Taking all the evidence into consideration, the Commission has made a downward adjustment
of 6% to staff costs. As stated above, the Commission is keen to hear feedback from
stakeholders in this area before making a final adjustment on staff costs.
Utilities costs
Utilities costs refer to electricity, water, chilled water, communications and waste management
costs. MAHB is projecting an increase in the electricity cost which is linked to the tariff and
volume increases. Increases for water and chilled water costs are associated with the removal
of the RM18 million per annum adjustment due to the expiry of the GDC concession in 2018.
For the telecommunications cost, the extension of the contractual revenue and cost sharing
arrangements with the telco operators at KUL-T1 terminal (which was previously the case for
only KUL-T2 terminal) has increased the level of revenues and costs recognised.
The Commission assessed that the increment in utilities costs are considerably higher at KUL
as compared to the other Malaysian airports analysed (except at LGK), where an increment is
related to the proposed increase in terminal size). The Commission understands that this is
primarily driven by higher tariff increases at KUL for electricity and the removal of an
accounting adjustment for the GDC concession.
KUL has the highest unitary costs of all the larger comparator airports, both in term of per
square metre or on per passenger basis. KUL costs are also high when compared to the wider
ASEAN context, being significantly higher than Thailand, Indonesia, Vietnam, India and the
Philippines. However, the Commission recognises that the cost of energy is determined by
local arrangements for generation, distribution and supply.
Taking all the evidence into consideration, the Commission has not made any adjustment to
the utilities costs.
Administrative costs
Administrative costs are generally lump sum costs or discretionary expenditures ranging from
professional fees, licences, travel expenses, insurance payments to sundry costs. These types
of costs are not linked to traffic volumes or the floor area of a terminal. Licence and insurance
costs will vary when they are renegotiated whilst the amount of travel expense and the
appointment of professional services are a discretionary decision.
MAHB forecasts a large increase in professional services fees linked to land subdivision and
legal cases, as well as material increase in marketing costs to support tourism authority actions
to attract new routes. The quit rent is also expected to increase due to recategorisation by the
land office.
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Administrative costs excluding marketing support are projected to decline in real terms across
all airports excluding Langkawi Airport, ranging from -14% at KUL to -30% to -40% at KCH,
BKI and PEN. The decline is even more significant when it is measured on a per passenger
basis. Around -50% for KCH, BKI and PEN, and -30% for KUL.
Based on its assessment that the costs are reasonable, the Commission has not made any
adjustment to this category of costs.
Repairs & Maintenance
The magnitude of the R&M costs is driven by the age and condition of assets and should be
considered as being split between regular planned and unplanned maintenance. MAHB has
not presented further information on the breakdown between planned and unplanned
maintenance, despite evidence showing that the age of some assets is leading to significant
unplanned or reactive maintenance activity.
The level of R&M costs would normally be impacted by the size of the asset base, which in
turn is linked to the capex programme. According to MAHB’s BP, R&M costs as a percentage
of the regulated asset base are projected to be around 4% of the asset base in the forecast
period. The Commission assessed each of the airports individually in terms of the R&M costs
on a per passenger basis against international benchmarks. On a per airport basis the
Commission found that the R&M costs proposed were generally in alignment with
benchmarks. However, the Commission considers that MAHB should consider ensuring
maintenance outcomes are properly considered and measured so that their value can be
considered against the sums spent.
In coming to the conclusion that the level of R&M costs spend was reasonable, the
Commission also considered the level of Minor Repex proposed at each airport as a
percentage of the asset base. International benchmarking indicates that allowances for Minor
Repex should usually fall within a 1% to 3% band. Consideration was given as to whether
MAHB were seeking R&M costs and / or Minor Repex that were both high against benchmarks
at each airport in turn, which was then found not to be the case. However, in some cases
MAHB’s Minor Repex proposals have been adjusted downwards in the Commission’s
assessment.
As part of the Commission’s review, the R&M costs were benchmarked against comparable
airports (in US dollars and converted to RM using an average exchange rate of RM4.00/USD).
The larger international airports were found to have an equivalent annual benchmark of
approximately RM5 per pax, whilst the smaller international or larger domestic airports being
approximated at RM2.50 per pax. On the other hand, the smaller domestic airports were found
to be approximated at RM1.25 per pax.
While there is general alignment in R&M costs based on the airport size, the Commission
found that there may be a case of inefficiencies of the costs utilised given the decline in ASQ
ranking, Skytrax ranking and general feedback on the performance of the airports’ assets. For
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the smaller airports, there is general alignment with the benchmarked values. However, the
following outliers require additional justification:
a) MKZ, MZV and LMN have a significantly higher R&M costs per pax than the benchmark
values (between RM12 and RM18 per pax); and
b) LBU and LDU R&M costs are higher than benchmarks (between RM3 and RM6 per pax).
Given the MAHB plans for expansion and refurbishment at each airport, it would also be
assumed that the R&M cost per pax ratio could reduce as assets are being replaced and
refurbished or increased as new assets are added. This is not the case however, and the
Commission will look to receiving feedback from MAHB on this matter.
Taking all the evidence into consideration, the Commission has not made any adjustment to
R&M costs.
User fees
Pursuant to the OA, user fees are paid by MAHB to the GoM for the right to operate the airports
and provides a source of funding for GoM’s airport capex. Any commercial activities that
generate revenues from the use of airport infrastructure provided by the GoM, assets provided
or financed by the GoM or land belonging to the GoM are subject to user fees. The user fees
percentage consists of a Baseline Percentage which is equivalent to 8.30% for the first quarter
beginning 1 April 2008 plus a cumulative quarterly increase of 0.0625% per quarter which is
capped at a maximum of 33.0%11. In 2018, the user fees percentage was 11.8% of revenues.
The user fees are in effect an operating cost to MAHB, which can also be argued to represent
a proxy remuneration of the GoM assets (airport development capex). As such, the
Commission maintains its position to allow the recovery of user fees into the RAB framework.
The value of user fees is a function of the level of allowed regulated revenue that MAHB is
allowed to earn. Therefore, if the level of regulated revenue is lower than the BP submitted by
MAHB, the level of user fees should also reduce.
The Commission has worked with MAHB to gain a better understanding of their calculation of
user fees contained in the BP. The Commission had some initial concerns about the potential
for taking into account some categories of non-aeronautical revenues more than once in the
calculations. Following this clarification, an adjustment was agreed with MAHB to better reflect
intercompany transfers and their impact on user fees.
The Commission understands that as part of the ongoing discussions with the Ministry of
Finance on the OA, there are possible changes to the level of user fees to be paid. However,
until such agreement has been reached between both parties, the Commission assumes
11 In addition, the percentage increases by a further 0.3% for every RM100 million that the GoM spends in development capex.
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continuation of the current OA arrangements regarding user fees, ranging from RM549 million
in 2020 to RM660 million in 2022.
Taking all the evidence into consideration, the Commission has applied the methodology
developed by MAHB and applied it to the Commission’s assessment of the building blocks.
Headquarters (discussion of allocation mechanism)
Essential services for the operation of the airports managed by MAHB are provided by its
Headquarters (including Information Technology, Finance, Human Resources, Strategy,
Technical and Operations) located in Sepang. Therefore, the costs of these services should
be able to be recovered through the regulated revenue. An allocation of headquarters costs to
each of the airports or airports groups is needed when looking at MAHB on a de-consolidated
basis. Some of the headquarters costs should also be allocated to the non-regulated business
(overseas airports, duty free, hotels, project repair and maintenance, and plantations).
Within MAHB’s BP, an 80% allocation of headquarters’ costs were allocated to the Malaysian
airports’ regulated business. A bottom-up analysis was undertaken by MAHB using
management accounting allocation metrics driven by operating costs, capital costs, revenue,
headcount and transactions which were then applied to specific cost lines. A minimum of 80%
or the outcome of the bottom up analysis was used to allocate these headquarters costs.
The Commission has reviewed the methodology and considers that based on the information
available, 80% is a reasonable estimate for RP1.
The Commission has reviewed the increase in staff numbers at MAHB’s HQ, 80% of which
are charged to the MAHB airports covered by the price cap. The Commission notes that MAHB
is forecasting material increases in staff numbers over the RP1 period, mainly due to increased
positions in Finance (including positions related to the RAB mechanism) and Strategy (related
to the planning of capital programme, legal and other functions).
Based on a bottom-up elasticity analysis, the Commission found that the proposed increases
appear high. However, the Commission recognises that additional skilled manpower will be
needed to develop and manage the large capital programme under MAHBs control. Further
clarification will be sought from MAHB through the consultation process as to the extent this
manpower is a HQ cost or should form part of the capitalised costs of the capital programme.
The Commission has not made any changes to the HQ staff cost assumption but will review
this decision following clarification of the treatment of staff for supporting the delivery and
management of the capital programme of MAHB.
HQ costs are expected to increase by 7.2% (lower than the historical growth of 10.9%),
primarily due to the increased headcount discussed above. The Commission has not made
any downward adjustments to these costs pending further explanation and discussion with
MAHB on their HQ staff cost assumptions and links to the delivery and management of the
capital programme.
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Depreciation & amortisation
In principle, the depreciation from MAHB’s financial statements or a regulatory depreciation
assumption can be taken into the building block calculation. In some jurisdictions, a straight-
line depreciation over an average life period of between 10 and 15 years is used.
MAHB uses a UOP approach to depreciation and amortisation based on passenger volume
and usage of airport activities over the operation period which is until 2069. This method
measures the depreciation based on the asset’s usage which is in turn based on passengers’
volume to reflect the usage of airport facilities over the concession period. The method reflects
the pattern in which the concession’s future economic benefits are expected to be consumed
and is applied consistently from period to period, unless there is a change in the expected
pattern of consumption of those future economic benefits.
Depreciation of other property, plant and equipment is provided for on a straight-line basis to
write off the cost of each asset to its residual value over the estimated useful life, at annual
rates tabulated in the following table:
Asset category Depreciation assumption
Freehold land Not depreciated
Leasehold land Over lease period
Buildings and building renovation 2%-20%
Hotel property 2%
Infrastructure, safety equipment and motor vehicles 4%-50%
Office, communication and electronic equipment 10%-50%
Furniture and fittings 10%-20%
Plant and machinery 10%-20%
Crockery, glassware, cutlery and linen 20%
Table 17 – Depreciation policies
Source: MAHB
The two methods lead to different profiles of depreciation, with straight line leading to an even
profile, which is close to the remuneration of debt, while the UOP method is aligned to usage
and therefore will be weighted to the later years where there is a higher number of passengers
projected to use the asset. The UOP also has the advantage of being aligned to the approach
MAHB presents in its accounts, and those used in its subsidiaries MASB and MA(S).
The Commission has considered the different options and decided that there is merit to retain
close alignment to MAHB’s financial accounts and has therefore used MAHB’s depreciation
costs, adjusted for the Commission’s allowable capex programme, in its price cap. Although
the Commission agrees with MAHB’s depreciation method, the adjustments made by the
Commission to the capex programme has resulted in a lower asset base. Thus, the 3-year-
average depreciation over the period of RP1 has been adjusted downwards from
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approximately RM525 million in MAHB’s November 2018 submission to around RM446 million
in the Commission’s draft base case.
Non-regulated revenues (commercial and other)
As part of the BP, MAHB submitted non-regulated revenues assumptions for the forecast
period till 2022. The Commission has reviewed the submission, focusing on the 6 largest
airports: KUL (Peninsular); PEN (Peninsular); LGK (Peninsular); SZB (Peninsular); BKI
(Sabah); and KCH (Sarawak), as well as overall trends.
Similar methods as described in the operating costs discussion were used, drawing upon
historical trend analysis, benchmarking to other comparator airports and some bottom-up
modelling based on industry trends.
Retail, F&B
Rent is paid to MAHB for the use of space by retail, duty free, and F&B concession operators.
Rental is charged based on a monthly MGP and a percentage of rental royalty (if applicable).
Rental royalty is calculated based on a certain percentage of the gross sales by the tenants.
The level of royalty paid is an outcome of the negotiation. Nevertheless, it may be influenced
by the form of the tender. For example, the duty-free concessions are let out to MAHB’s fully
owned subsidiary, MA (Niaga) which means the arrangements is on an intra-Group basis and
there being no open tender conducted to open up the duty-free concession to third parties.
The range of royalty levels reported in the BP of 5% to 27% appear to be relatively low by
international standards. Depending on the arrangements, a more common royalty rate12 would
be based on the followings; F&B: 12% to 25%, Duty Free: 30% to 40%, and speciality retail:
15% to 25%, with the lower end of the range for more domestic passenger dominated airports
and the higher end of the range at international capital city airports such as KUL.
MAHB is in the process of implementing a commercial reset of its retail activities. The benefits
of this reset are expected to be realised in 2021 and 2022, with some downturn in performance
in 2019 and 2020 as the reset involves some closures of space and conversion to alternative
use.
The profile of spend is impacted by the mix of passenger expected. MAHB is expecting some
decline in sales per passenger linked to the types of passengers using its airports (with fewer
high spending passenger and more medium and lower level spenders).
Following the Commission’s assessment, KUL’s yield per passenger is found to be 2 or 3 times
higher than at the other large Malaysian airports but considerably below regional standards.
KUL’s yield per passenger (RM11) is considerably lower than the yields achieved in Hong
12 Based on international benchmarking exercises done by the Steer Group
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Kong International Airport (RM55) and Changi Airport (RM60), representing less than one fifth
of the yield achieved in these two main terminals of South East Asia. It is also lower than
Thailand International Airports (RM15) which includes Suvarnabhumi Airport but also smaller
regional airports such as Hat Yai, Chiang Mai and Chang Rai. On the other hand, KUL
achieves better yields than airports from India, Indonesia and Vietnam but it worth noticing that
these countries have a considerably lower cost of living and for the latter two nations, these
numbers also reflect the yields of smaller and more regional airports.
MAHB has announced its intentions to maximise retail, F&B revenue at KUL, however, yield
per passenger is assumed to remain unchanged (when comparing 2022 to 2017 in real terms
per passenger).
For LGK, MAHB is projecting an increment in retail, F&B revenue yield per passenger and per
sqm yields. However, sales per square metre at LGK will be 20% lower than in BKI and circa
40% lower than in PEN, on average.
Minor total revenue growth in real terms is expected for PEN. Yield per passenger is expected
to decline which can be partially explained by the potential overcrowding of the terminal. Yield
per passenger is projected to decline by 10% at BKI but to grow strongly in terms of per square
metre of terminal space. KCH is expected to decline in real terms, which when combined with
traffic growth, leads to a large reduction in the yield per passenger (-34%). Subang yields per
passenger and per square metre of commercial terminal are atypically low linked to
commercial arrangements there.
For the other 5 largest Malaysian airports, it is clear that yields per passenger are at the low
end of the regional benchmark. Yields at these 5 airports are lower than in Thailand, Indonesia,
the Philippines and India. Countries with a considerably lower income per capita. Furthermore,
with the exception of LGK, MAHB is projecting a decline in the yields per passenger across
these airports.
Based on the Commission’s assessment, the retail, F&B forecasts appear relatively
unambitious despite the retail reset initiative being implemented by MAHB. There appears to
be a case for the level of retail and F&B yield per passenger in real terms to increase back to
2018 levels following the full implementation of the commercial reset program in 2020 and
2021. This also reflects the outcome of benchmarking on yield per passenger and concession
royalty rates described above. There should also be significant opportunity for improvements
to royalty levels as contracts expire and are renegotiated on a commercial basis.
Taking all the evidence into consideration, the Commission has adjusted the yields to be closer
to 2017 or 2018 real yields per passenger for the years after the commercial reset program
has been completed in 2021 and 2022 (the final two years of RP1).
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Car parking and car rental
MAHB receives income from the operation of car parks and the concession and rental income
from third party car rental companies. Many of MAHB’s car parking facilities are old and in
need of a refresh, which may need to be extended to lighting, overall maintenance and yield
management of the facilities.
MAHB expects limited revenue growth at KUL due to high levels of utilisation, while at the
other Malaysian airports, there is growth at PEN due to a new multi-storey facility. Some
airports, particularly KUL is subject to off-airport competition, and in addition the increased
uptake of e-hailing services has caused some disruption to the car parking market. In LGK, a
number of the car parking spaces are utilised by car rental fleets, meaning it is a relatively poor
performer on a benchmark basis.
The Commission assessed that total car parking and car rental revenue is expected to grow
in real terms only at KCH and SZB. Yields per passenger are expected to decline across all
airports except SZB, which is in contrast with increments observed between 2015 and 2017.
In 2018, based on MAHB’s actual results, car parking yield per passenger has increased at a
rate of greater than inflation at KUL, SZB and KCH, but yields have reduced in nominal terms
at PEN and BKI. LGK sees more pronounced reductions, potentially resulting from use of
space by car rental companies.
MAHB states that car parking facilities are at capacity in KUL and this is likely to be the case
for the other large Malaysian airports which is a restriction to organically growing the business.
However, this should open an opportunity for an active yield management strategy and
introduction of new products.
MAHB included several expansion plans in its car parking facilities in its BP and CIP. However,
this is not reflected in total amount of revenue generated across any of these airports.
Overall, the Commission assessed that, given MAHB’s initiatives and historic trends, it would
be expected that car parking revenue could grow at a faster rate than MAHB is projecting,
potentially at a similar rate to traffic growth. If growth is constrained by parking capacity
(volume), this should open up an opportunity to grow revenue through higher prices (yields),
new products (valet, pre-booking) and replacement forms of income (access charges).
For regional benchmarking, there is limited data available in terms of car parking and car rental
yields in the region. Most of the information available is for airports in India, the western
network of Indonesian airports and Songshan Airport in Taiwan. As most of the benchmark
points refer to India, it is important to note that car parking yields in India tend to be relatively
low due to limited disposable income and cultural aversion towards paying for vehicle parking.
KUL’s yield in 2017 is largely aligned with the yield achieved in Western Indonesia and with
most of the airports from India apart from Hyderabad where it is more than twice this value.
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For the other international airports, with the exception of PEN, their yields per passenger are
located in the lowest quartile of the comparison.
The Commission assessed that there is an opportunity for better yield management and
introduction of new products in car parking and car rental. Taking all the evidence into
consideration, the Commission has made adjustments across all the main airports to be closer
to historical 2018 yields over the forecast period or has taken the MAHB’s revenue forecasts
if higher.
Advertisement
The existing contract for advertising income at MAHB’s airports ends in 2024. The contract is
fixed related to space utilisation and does not contain a royalty. There is some escalation in
the per annum fixed payment every 3 years, which do not seem to be in line with inflation.
For international airport contracts, it would be expected that some element of royalty payment
would be included as advertising revenues should be driven by the footfall in the terminal as
well as the space available for advertising which will be correlated with terminal area. MAHB
forecasts for advertising revenues to be constrained by full utilisation of advertising space.
MAHB’s advertising revenue forecasts, in real terms, is projected to decline across all the
airports except at KUL where a small increment is anticipated due to renting additional space
at the KUL-T2 terminal. The forecasts appear to be consistent with advertisement contracts
that are not linked to inflation, traffic volumes or expected to be renegotiated over the period
to 2022. As a consequence, yields per passenger are expected to drop over RP1, which is
worth noting given that current yields are at the low end of regional benchmarks.
Based on international precedent of contractual structures, it would be reasonable to expect
advertisement revenues to grow at least in line with inflation, and to reflect some real growth
due to higher passenger volumes. This is not reflected in MAHB’s projections in the BP.
Limited benchmarking data is available. KUL achieves lower yields than the two Indian airports
(Delhi and Hyderabad) and higher than networks in Indonesia and Vietnam. The other
Malaysian airports are all lower yields than the regional benchmarks.
As the contract is fixed until 2024, the Commission recognises that MAHB does not have the
ability to change the commercial arrangements for this contract and has therefore not made
any adjustments to this line. There are opportunities for MAHB to address this in RP2.
Property revenue
MAHB’s property revenue includes income derived from the rental of office spaces, lounges,
storages, land lease and point of sale services, based on a fixed monthly charge. MAHB’s
forecasts are based upon organic growth based on finalised contracts.
60
The Commission assess that there is a significant increment in property revenue anticipated
for KUL, SZB and PEN. This growth is generally linked to renting additional space and to a
lesser extent via renegotiation of contracts. Revenue growth trend for LGK, KCH and BKI
suggests that rental contracts are neither linked to inflation, nor are expected to be
renegotiated over the next 4 years.
The Commission has not made any changes to this revenue line.
Other commercial revenues
MAHB also receives income from the recoupment of utilities costs from concessionaires and
other sources of income. The recoupment of income is expected to grow in line with
consumption and cost increases. The other sources of income are relatively small and consist
of items such as revenue from AVSEC and engineering revenues.
The Commission has not made any changes to these revenue lines.
Total commercial non-aeronautical revenues
Overall, total commercial non-aeronautical revenue is projected by MAHB to grow by 6.7% per
annum from 2017 to 2022, lower compared to the historical growth of 8.0%.
Total commercial non-aeronautical revenue is projected by MAHB to grow across all the major
MAHB airports except KCH. However, revenue growth is expected to fall behind traffic growth
leading to a material decline in yield per passenger across the airports, in particular at KCH,
BKI and PEN.
Deterioration in total non-aeronautical yield per passenger is consistent with the profile
observed across individual revenue lines for which MAHB is anticipating a material decline,
especially, across car parking and car rental and advertisement, but also for the retail, F&B
category.
This trajectory is not consistent with MAHB’s strategic goal of boosting non-aeronautical
revenue as part of its objectives for RP1. It is also in clear contrast with the most recent
historical trend observed in yield per passenger (2015-2017) when yields went up at some
airports and marginally declined at others.
KUL’s total commercial non-aeronautical yield is not high in the regional context, considerably
behind the main hubs of the region, and below the performance achieved by Thai international
airports. Similar comments apply to the other Malaysian international airports where yields are
lower than the values achieved by airport of similar size in the Philippines or Taiwan as well
as the consolidated networks of Indonesia.
As discussed earlier in the paper, there are opportunities for MAHB to increase the royalty
rates received from concessionaires across the portfolio of services (Duty Free, F&B, speciality
retail and advertisement). To achieve this, it would need to allow full competition for the
61
provision of these services rather than the prevailing arrangements. As such, the Commission
would expect to see by RP2 that the commercial yields from MAHB’s non-aeronautical
business has increased to be in line with the average amongst ASEAN countries. As such, the
Commission would expect to see by RP2 that the commercial yields from MAHB’s non-
aeronautical business has increased to be in line with the average amongst ASEAN countries.
Other non-regulated aeronautical revenues
MAHB receives income from aerobridge, check-in-counters and other miscellaneous items.
These are classified as non-regulated aeronautical revenues.
MAHB projects them to grow with passenger traffic, as well as an expectation of an increased
uptake in the GPU and PCA consumption.
The Commission has not made any adjustments to the MAHB forecasts.
WACC
Under the RAB Framework and as per ICAO’s Policies on Charges for Airports and Air
Navigation Services (Doc 9082), airport operators are allowed to earn a reasonable rate of
return on its assets. This is provided through an allowance of the WACC applied to the RAB.
Following the October 2018 Consultation Paper, the Commission has undertaken additional
analysis on the WACC to be applied under the RAB Framework. The foundation for, and range
of WACC values are provided in the table below.
These are built on the basis of the CAPM, and a targeted nominal, pre-tax WACC. Table 18
below provides the summary of each component of the WACC.
WACC Component Oct 2018
Consultation Paper
MAHB
proposal
MAVCOM
revised
Reference sub-
section
Optimal Debt/Capital
ratio – (G) 40 - 60% 44% 50% (a)
Risk free rate (Rf) 3.90% - 4.00% 4.25% 3.90% (b)
Tax rate 24.00% 24.00% 24.00% (c)
Cost of debt (Kd) 4.1% - 4.5% 5.62% 5.46% (d)
Beta (levered) 0.7 – 1.5 1.41 1.07 (e)
Adjusted Beta (re-
levered) (β) 1.2 – 1.7 1.66 1.20 (e)
Market return (Rm) 11.0% 11.1% 11.0% (f)
Cost of equity (Ke) 12.3% - 15.7% 15.7% 12.39% (g)
62
WACC Component Oct 2018
Consultation Paper
MAHB
proposal
MAVCOM
revised
Reference sub-
section
Nominal pre-tax
WACC 9.0% - 11.0% 14.0%^ 10.88% (h)
Nominal post-tax
WACC 6.8% - 8.4% 10.64% 8.27% -
^Although a range of 12.7% to 14.0% was submitted in MAHB November 2018 submission, MAHB’s
calculation of the regulated revenues was based on 14.0%.
Table 18 – WACC assumptions
Source: MAVCOM analysis, MAHB, Bloomberg
Methodology Issues
The Commission had stated in the October 2018 Consultation Paper that the methodology to
arrive at the WACC is built on the CAPM. This is consistent with the methodology adopted by
other countries and the other industries.
The Commission had received little feedback regarding the CAPM methodology used to arrive
at the appropriate WACC for MAHB. The feedback to the October 2018 Consultation Paper
did not suggest a departure from the WACC and CAPM approach, and the Commission
therefore concludes that the WACC continues to be the most appropriate way to assess the
cost of capital and the CAPM is the most appropriate way to assess the cost of equity. The
WACC will then be fixed throughout RP1.
The Commission had also proposed the usage of real pre-tax WACC which is the calculation
used by regulators when the forecast tax expenses is not included in the forecast operating
expenses and the tax impact is actually included in the WACC calculation itself, by dividing
the post-tax WACC with the tax shield (1-t). The real pre-tax WACC is derived by applying the
Fisher formula to the nominal pre-tax WACC calculation.
MAHB through the feedback submitted on the October 2018 Consultation Paper, and via
various discussions with the Commission, had stated its preference for nominal pre-tax WACC
to calculate the fair rate of return. The airport operator argued that the figures as per its
regulatory figures submission in November 2018 are all in nominal terms.
Taking into consideration of the feedback and the BP and CIP submissions by MAHB, the
Commission decided to use the nominal pre-tax WACC to be applied in the RAB Framework.
The airport operator, in this case, MAHB, will bear the inflation risk.
63
(a) Optimal debt-to-capital ratio
Most regulators apply an optimal gearing ratio in the calculation of WACC to illustrate that the
airport business is stable and may deserve a higher gearing ratio for a more efficient cost of
capital. Based on research done by the Commission, the range of optimal gearing for airports
that use asset-based frameworks used by regulators globally fall between 40% and 60%. In
the emerging thoughts shared in the October 2018 Consultation Paper, the Commission had
applied an optimal debt-to-capital ratio of 60% [Debt / (Debt + Equity)]. The optimal debt to
capital ratio was in turn utilised in both the re-levered beta and WACC weighting calculation.
The Commission had received some feedback on the optimal gearing ratio applied, which
specifically mentioned that for RP1, the 60% gearing ratio is too aggressive for an airport
operator of an emerging economy. A further feedback also stated that the target capital
structure should be based on market value of equity and not on book value. This was
supplemented by several literature supporting the view of using market value.
A further analysis suggests that other jurisdictions use market value of equity for publicly listed
airport operators. However, the Commission is also aware of the constraints in MAHB’s debt
headroom arising from its historical adherence to its existing debt covenants and rating
thresholds. Further analysis has also been undertaken to consider the potential impact of
higher gearing on MAHB’s share price.
The perpetual sukuk programme by MAHB has resulted in additional constraints for MAHB to
adhere to, to ensure its credit rating remains viable for long-term investment, and to remain at
least at a AA3 rating. The Commission notes that the calculation of the gearing by credit rating
agencies is pegged to the book value of MAHB’s equity, instead of market value. The table
below shows MAHB’s gearing ratio and Operations Cash Flow/Debt ratio over the 2016-2018
period.
MAHB 2016 2017 2018
Gearing Ratio 0.64 0.62 0.56
Gearing Ratio - Credit Rating methodology^ 0.74 0.71 0.65
Operation Cash Flow/Debt Ratio 0.18 0.20 0.24
^Note – the perpetual sukuk value apportioned into debt and equity equally
Table 19 – Gearing Ratios & Operations Cash Flow/Debt Ratio
Source: MAVCOM Analysis
The Commission notes that the investment grade rating of AA3 is 3 notches lower than the
MAHB’s current rating of A3/AAA (Moody’s). At the same time, the Commission’s role is not
to determine the actual gearing levels for MAHB but rather to ascertain an optimum gearing
level. MAHB is therefore free to determine its target capital structure at a level that it deems
fit. Taking all factors into consideration, amongst others, the stability and ability of the airport
operator to gear up as well as ensuring that MAHB’s rating to be at the minimum of long-term
investment grade, the Commission is applying a debt-to-capital ratio of 50% to be applied to
the CAPM and WACC calculation, based on the book value of equity.
64
(b) Risk-free rate
The Commission had used the range of 3.9% to 4.0% for the risk-free rate calculation, which
was the 10-year monthly average of MGS over a few varying time periods. Several
stakeholders, however, had urged caution against using 10-year historical averages.
The Commission argues that a 10-year historical average would be reflective of a full economic
cycle. Whilst the more recent economic conditions could well be different than later years, the
Commission places greater importance to the economic cycle which will provide a more stable
value in estimating the risk-free rate, as compared to using forward-looking figures to estimate
the risk-free rate.
As such, the Commission is applying a risk-free rate of 3.90%, which is the 10-year historical
average of MGS’s 10-year yield as at 31 March 2019.
(c) Tax rate
The Commission had used the tax rate of 24%, which is the corporate tax rate in Malaysia.
The Commission did not receive any feedback with regard to the usage of this rate, thus
maintains the assumption to arrive at the WACC value.
(d) Cost of debt
The Commission had presented the range of 4.1% to 4.5% for the cost of debt, which reflects
MAHB’s historical effective interest rates between 2007 to 2017. The effective interest rate
calculations consider the dividend payable to the perpetual sukuk holders amounting to RM58
million per year, since 2015.
The Commission takes note of stakeholders’ feedback regarding the usage of historical cost
of debt, particularly on MAHB’s previous role as an asset-light airport operator.
This RAB Framework assumes that the airport development is undertaken by the airport
operator. The Commission is agreeable to the idea of ratings-based spread instead of using
historical cost of debt, to ensure a fair rate of return to the airport operator.
Taking into consideration the potential impact to MAHB’s credit rating that may go down by 2
notches to AA3 rating, the Commission is therefore applying a ratings-based spread to arrive
at MAHB’s Cost of Debt. The Commission is using the spread between a 10-year historical
average MGS and AA3-rated debt of 1.55% and 10-year historical average MGS of 3.90% as
stated above, to arrive at Cost of Debt of 5.46% as at 31 March 2019.
(e) Beta (levered and re-levered)
The Commission had given a range of 0.7 to 1.5 for the levered beta in the October 2018
Consultation Paper. This range was derived by using historical averages (1-year, 3-year, 5-
65
year, and 7-year averages) and taking into consideration the average beta between 2009 to
2013.
The number of years used to calculate the average value of beta needs to be carefully
considered as it includes the market movements attributable to MAHB as a holding company.
The Commission views that the beta needs to be calculated post 2009, after the OA was
signed, which represents the current environment MAHB is operating in. The Commission also
takes note of MAHB’s feedback in this regard, where it argues that a more recent, shorter time
period should be used. MAHB cited that its characteristics and risk profile has changed
significantly over recent years driven by recent MH incidences, the extension of the OA by a
further 35 years to 2069, and KUL-T2 development completion in 2014. The chart below shows
the different average levered betas by the number of years.
Figure 7 – Average weekly Beta (until 31 March 2019)
Source: MAVCOM Analysis
The Commission has deliberated on the factors concerning beta, particularly on the changing
operating market environment of MAHB. The levered betas of comparable airport operators
such as Airport of Thailand and AENA range from 0.60 to 0.7013 as at 31 March 2019. The
Commission is also cognisant that comparable airports may not be the most appropriate
methodology to be used in RP1, considering that MAHB will have to take on a significant
amount of capex whereas some of the comparable airports are already in its third regulatory
cycle.
The Commission is applying a 3-year weekly MAHB historical average levered beta of 1.07 to
generate the cost of equity as at 31 March 2019. The 3-year average beta considers the
completion of KUL-T2 expansion and the impact of the unfortunate MH twin tragedies, both of
which happened in 2014.
13 Historical 3-year betas
0.99
1.22
1.39
1.071.01
0.68
10-Yr 7-Yr 5-Yr 3-Yr 1-Yr 2009-2013
66
The levered beta is then unlevered to arrive at asset beta of 0.68, which then be re-levered
using the optimal gearing ratio of 50.0%, that results in re-levered beta of 1.20.
(f) Market return
The Commission had referenced the Market Return of 11.0% in the October 2018 Consultation
Paper, which was based on the empirical study on Equity Risk Premium by Aswath
Damodaran at the Stern School of Business at New York University, for the year 2017 and
2018.
The Commission continues to refer to the Equity Risk Premium based on Aswath Damodaran
empirical study and has lengthened the time horizon for the average to 3 years, to be from
2017 to 2019. There is a slight difference in the Equity Risk Premium average calculated, and
the Commission has decided to round up the Market Return to be at 11.0%.
(g) Cost of equity
The Cost of equity was derived using the following formula: Rf +β (Rm - Rf). The Commission
had previously stated in the October 2018 Consultation Paper of a range for the cost of equity,
which was between 12.3 to 15.7%.
By applying the same formula, the Commission has applied the risk-free rate, beta and market
return as discussed previously and arrived at the cost of equity of 12.39%.
(h) Summary
To summarise, the Commission has taken into consideration all feedback and have further
analysed the impact of each feedback on the components of WACC. Based on the bottom-up
approach as well as top-down research, the Commission has proposed that a WACC value of
10.88% is to be applied in this framework.
Traffic forecast from MAHB for RP1
As part of the BP and CIP submission on 30 November 2018, MAHB submitted its traffic
forecast for the period between 2019 and 2022. The Commission then reviewed the traffic
forecast as detailed below. The objective is to ascertain the reasonability of the forecast to be
inserted into the RAB model for the eventual target of calculating the regulated revenue yield
per departing passenger at all MAHB airports. The full analysis is appended in Appendix 1.
MAHB traffic forecasts (2019 to 2022)
MAHB forecasts its passenger traffic using an econometric model with GDP as the
independent variable and the passenger traffic as the dependent variable. The correlation
between GDP and passenger traffic is 0.98, indicating that the passenger traffic and GDP are
strongly related. Adjustments are made to the regression output by considering supply-side
67
factors such as, the airlines’ schedule and fleet delivery plans, the non-GDP demand factors
such as, the relaxing of tourist visa policies, currency fluctuations, and special events such as
elections or tourism promotions.
The Commission notes that MAHB’s passenger traffic have historically been in line with the
forecasts, with the deviations (measured on a sum of squares approach) being around 5% per
annum (at an aggregate level). Previous estimates were undertaken on an annual basis and
was developed 1 year ahead of the actual traffic realisation.
Figure 8 – Actual vs. forecasted passenger traffic, 2012 – 2018
Source: MAHB
In their forecasts, MAHB had taken into account an increase in crude oil prices, from a forecast
price of USD55/bbl to around USD71/bbl, a lower level of growth in seat capacity from
Malaysian carriers and projected GDP growth of 4.5% in 2019 and 4.2% CAGR from 2019 to
2022.
MAVCOM traffic forecasts (2019 to 2022)
The Commission has developed its own passenger demand forecast which used annual time
series data from 2000 to 2018. The passenger traffic is divided and forecasted according to 4
clusters of airports proposed under the RAB framework. The dependent variables for each of
the clusters was the sum of passenger traffic in all airports in the cluster, while the independent
variables were Malaysia’s GDP (constant), crude oil price, exchange rate, and the percentage
of state GDP.
Based on the forecast, the Malaysia passenger traffic (ex-JHB, Sabah and Sarawak
STOLports) will increase from 99.0 million in 2018 to 115.2 million in 2022, registering a 4-
year CAGR of 3.9%. When compared to the forecast made by MAHB, they had forecasted its
passenger traffic higher than the Commission’s forecast in each year with a 5.7% CAGR from
65.3
71.9
82.4
85.8
86.0
94.7
103.4
67.2
79.683.3
83.8
89.0
96.699.1
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
2012 2013 2014 2015 2016 2017 2018
Pa
sse
ng
er
Tra
ffic
(m
illio
n)
Projected Actual
68
2018 to 2022 (see Figure 9). The higher growth projection from MAHB may be due to positive
adjustments to airline long-term growth plans, new fleet delivery, and stable fuel prices.
Figure 9 – MAVCOM vs. MAHB: Malaysia passenger traffic forecast, 2018 – 2022
Source: MAHB, MAVCOM Analysis
Selection of MAHB traffic forecasts for RP1
For the purposes of selecting the appropriate traffic forecast for RP1, the Commission is
proposing to select MAHB’s traffic forecasts for the basis of the departing passenger traffic,
due to several factors. Firstly, as air transport is closely associated with economic activity,
passenger traffic growth will generally follow GDP growth; changes in GDP would result in
changes in the passenger traffic forecast. Secondly, given that GDP data and forecasts are
widely available, this model will not be subject to data limitations that can affect more complex
models. Thirdly, MAHB as the airport operator may have better information and access to
granular data through its day to day operations and close relationship with airlines, enabling it
to have more information on airlines’ planned schedules and aircraft deployment. Lastly, the
Commission considers that MAHB’s historical passenger traffic forecasts have been in line
with the actual figures, which lends credence to MAHB’s forecasting ability and is appropriate
given that the traffic risk borne by MAHB in a price cap method.
Taking into account all of the above, the Commission is currently leaning towards MAHB’s
traffic forecasts to be applied in this RAB Framework for the basis of departing passenger
traffic in RP1 due to the fact that MAHB’s historical passenger traffic forecasts have been in
line with the actual figures, which lends credence to MAHB’s forecasting ability and is
appropriate given that the traffic risk borne by MAHB in a price cap method.
99
.1
10
2.9
10
6.7
11
1.1
11
5.2
99
.1
10
4.3
11
0.5
11
7.0
12
3.8
2.93.9 3.7 4.1
3.6
5.45.9 5.9 5.8
-10
-8
-6
-4
-2
0
2
4
6
80
90
100
110
120
130
140
150
2018 2019 2020 2021 2022
YoY
Gro
wth
(%)
Passenger
Tra
ffic
(m
illio
n)
MAVCOM MAHB
MAVCOM Growth (RHS) MAHB Growth (RHS)
69
SUMMARY OF ADJUSTMENTS TO MAHB’S SUBMISSION
As highlighted earlier in the document, the Commission has formed a MAVCOM draft base
case which forms the basis of the draft price cap. As a summary, the following changes were
made to the MAHB November 2018 BP and CIP:
a) Adjustments to operating expenditure;
b) Adjustments to non-aeronautical revenues;
c) Adjustments to capex;
d) Assessment of traffic forecast; and
e) Assessment of an appropriate regulated WACC for MAHB.
The key assumptions used in the modelling are outlined below.
Adjustments to operating expenditure
Based on the Commission’s analysis, headcount growth at KUL has been adjusted downward
to reflect a bottom-up assessment that is more appropriate based on industry benchmarking.
Using industry-standard assumptions, the Commission has estimated that the number of
additional staff should be lower than that forecasted by MAHB. This in turn represents a
difference of approximately 6% in staff costs for KUL.
This has also included the adjustment agreed with MAHB for intercompany transfers and their
impact on user fees.
Adjustments to non-aeronautical revenues
The Commission assessed that there are parts of the non-aeronautical assumptions used by
MAHB in its November BP which are not sufficiently ambitious and not in line with the strategic
theme of enhancing the non-aeronautical business. The Commission has subsequently made
the following adjustments:
a) retail, F&B: Adjustments of yields to be closer to 2017/ 2018 levels (unless forecasted
by MAHB to be higher) for the years following the completion of the commercial reset
program in 2021 and 2022; and
b) car parking: Adjustment across all main airports to be closer to historical 2018 yields
over the forecast period (or the MAHB forecasts if higher).
Adjustments to capex
MAHB submitted a total capex of RM11.2 billion for the 2019 to 2022 period, of which RM10.0
billion was for the RP1 period (2020-2022) for the key projects as tabulated earlier in the
document. Overall, the Commission assessed the projects and made the following
adjustments:
a) reduced the capex requirements at KUL, BKI, KCH, LGK, SZB, TWU and SBU;
70
b) removed the capex requirements for KBR and SDK given the GoM has indicated it will
finance these airports;
c) increased the capex requirement at PEN as the Commission did not receive the detailed
breakdown of the projected capex and therefore had to make its own assumptions;
d) aligned the annual cashflows based on complexity, scale and/or justification for
investment which included deferring some works; and
e) for airports not covered by the detailed review, and included in the clusters, capex has
been kept at the same level as the MAHB CIP submission.
For depreciation, the Commission has adjusted downward the total depreciation. This was
achieved by maintaining the percentage of depreciation over the asset base (based on MAHB
November 2018 submission) and applied the percentages to the Commission’s adjusted asset
base. As a result, the 3-year-average depreciation over the period of RP1 has been adjusted
downwards from approximately RM525 million in MAHB’s November 2018 submission to
around RM446 million in the Commission’s draft base case.
After making all the necessary adjustments, the Commission has arrived at an adjusted capital
programme of approximately RM5.0 billion for RP1.
Assessment of an appropriate regulated WACC
Based on the assumptions described on page 61, the Commission is proposing a value of
10.88% nominal pre-tax WACC compared to the 12.7% to 14.0% range proposed by MAHB
in its November 2018 submission.
Outputs
The accompanying tables show the changes in the RAB values if it were in a network setting
and in a cluster setting. These figures are based on the Commission’s proposed adjustments.
All numbers presented in these tables are in nominal terms including a forecast of price
inflation in Malaysia over the 2018-2022 period of approximately 3% per annum.
(the remainder of this page is intentionally left blank)
71
Overall RAB and price caps for MAHB’s Malaysian airport business, based on MAVCOM
draft base case
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 8,298.7 8,311.4 8,508.1 9,788.3 11,117.9
Capex 348.5 581.0 1,688.2 1,784.4 1,612.0
Disposals (5.5) - - - -
Depreciation (330.3) (384.4) (408.0) (454.7) (476.7)
RAB Closing balance 8,311.4 8,508.1 9,788.3 11,117.9 12,253.2
Operating costs 1,905.0 2,155.4 2,309.2 2,430.7 2,537.4
Depreciation 330.3 384.4 408.0 454.7 476.7
Return on capital (WACC) 903.6 915.0 995.3 1,137.3 1,271.4
Non-regulated aeronautical revenues (65.9) (66.3) (70.6) (75.3) (80.0)
Non-aeronautical revenues (1,163.7) (1,217.6) (1,299.3) (1,410.4) (1,511.5)
Regulated revenues 1,909.3 2,170.8 2,342.7 2,537.0 2,694.0
Departing passengers (thousands) 49,717.7 52,420.8 55,523.7 58,805.8 62,247.2
Price cap (RM) 38.4 41.4 42.2 43.1 43.3
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 20 – Overall RAB and price cap for all airports (MAVCOM draft base case)
Source: MAVCOM analysis, MAHB
The MAHB BP and CIP submissions, updated for 2018 actual data and an amendment to the
user fee calculation, would have led to an escalating level of regulated revenues over the
forecast period, which implies almost a doubling of tariffs across the network as per the MAHB
November 2018 submission (Refer to Table 2). This is based on the 83% increase in the price
cap (regulated revenue per departing passenger) from RM34.8 earned in 2018 to RM63.8 in
2022.
In comparison, the Commission revised base case, after adjusting for each component of the
building block, leads to a 24% increase in price cap from RM34.8 earned in 2018 to RM43.3
in 2022. This results in a more modest set of tariff increases whilst ensuring the airport operator
would have a fair rate of return and sufficient funding for its operations and investments.
The specific RAB values for each cluster are as tabulated in the following 4 tables.
72
RAB and price caps per cluster, based on MAVCOM draft base case
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 7,317.1 7,277.6 7,403.4 8,254.7 8,867.3
Capex 242.1 465.3 1,214.8 1,019.5 1,056.2
Disposals 4.6 - - - -
Depreciation (286.2) (339.4) (363.5) (406.9) (431.7)
RAB Closing balance 7,277.6 7,403.4 8,254.7 8,867.3 9,491.8
Operating costs 1,385.0 1,578.5 1,703.0 1,772.1 1,853.8
Depreciation 286.2 339.4 363.5 406.9 431.7
Return on capital (WACC) 794.0 798.6 851.8 931.4 998.7
Non-regulated aeronautical revenues (50.8) (49.8) (52.2) (55.3) (59.0)
Non-aeronautical revenues (962.4) (993.9) (1,066.5) (1,162.5) (1,251.0)
Regulated revenues 1,452.0 1,673.0 1,799.6 1,892.6 1,974.2
Departing passengers (thousands) 30,241.1 30,655.9 32,603.2 34,661.0 36,818.4
Price cap (RM) 48.0 54.6 55.2 54.6 53.6
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 21 – Overall RAB and price cap for KUL (MAVCOM draft base case)
Source: MAVCOM analysis, MAHB
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 750.8 775.9 802.8 1,189.8 1,773.6
Capex 62.5 58.8 418.5 618.9 304.7
Disposals (5.2) - - - -
Depreciation (32.2) (31.9) (31.5) (35.1) (33.0)
RAB Closing balance 775.9 802.8 1,189.8 1,773.6 2,045.3
Operating costs 242.0 266.1 282.0 309.9 320.5
Depreciation 32.2 31.9 31.5 35.1 33.0
Return on capital (WACC) 83.1 85.9 108.4 161.2 207.7
Non-regulated aeronautical revenues (6.0) (6.4) (6.7) (7.3) (7.7)
Non-aeronautical revenues (117.0) (140.3) (146.2) (155.9) (163.1)
Regulated revenues 234.2 237.2 269.0 343.0 390.5
Departing passengers (thousands) 8,258.9 8,794.8 9,318.0 9,873.9 10,456.7
Price cap (RM) 28.4 27.0 28.9 34.7 37.3
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 22 – Overall RAB and price cap for Peninsular (MAVCOM draft base case)
Source: MAVCOM analysis, MAHB
73
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 144.9 150.0 183.8 209.7 272.5
Capex 14.3 41.2 33.4 70.3 98.6
Disposals (3.7) - - - -
Depreciation (5.4) (7.5) (7.5) (7.5) (7.1)
RAB Closing balance 150.0 183.8 209.7 272.5 364.0
Operating costs 122.5 143.6 148.2 159.1 166.1
Depreciation 5.4 7.5 7.5 7.5 7.1
Return on capital (WACC) 16.0 18.2 21.4 26.2 34.6
Non-regulated aeronautical revenues (4.3) (4.2) (5.0) (5.2) (5.4)
Non-aeronautical revenues (30.6) (28.4) (29.2) (29.8) (31.4)
Regulated revenues 109.1 136.6 142.9 157.8 171.0
Departing passengers (thousands) 5,260.5 6,070.9 6,362.8 6,671.5 6,995.6
Price cap (RM) 20.7 22.5 22.5 23.7 24.4
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 23 – Overall RAB and price cap for Sarawak (MAVCOM draft base case)
Source: MAVCOM analysis, MAHB
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 85.9 107.9 118.0 134.2 204.5
Capex 29.7 15.7 21.6 75.7 152.4
Disposals (1.2) - - - -
Depreciation (6.5) (5.6) (5.4) (5.3) (4.9)
RAB Closing balance 107.9 118.0 134.2 204.5 352.1
Operating costs 155.5 167.2 176.0 189.6 197.1
Depreciation 6.5 5.6 5.4 5.3 4.9
Return on capital (WACC) 10.5 12.3 13.7 18.4 30.3
Non-regulated aeronautical revenues (4.8) (6.0) (6.6) (7.5) (7.9)
Non-aeronautical revenues (53.6) (55.1) (57.4) (62.2) (66.0)
Regulated revenues 114.0 124.0 131.2 143.6 158.3
Departing passengers (thousands) 5,957.2 6,899.2 7,239.6 7,599.4 7,976.5
Price cap (RM) 19.1 18.0 18.1 18.9 19.8
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 24 – Overall RAB and price cap for Sabah (MAVCOM draft base case)
Source: MAVCOM analysis, MAHB
74
Figure 10 – Price cap on a network level, All airports
Source: MAVCOM analysis, MAHB
Figure 11 – Price cap by cluster, KUL
Source: MAVCOM analysis, MAHB
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2018A 2019F 2020F 2021F 2022F
Price c
ap (
RM
)
MAHB MAVCOM
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2018A 2019F 2020F 2021F 2022F
Price c
ap (
RM
)
MAHB MAVCOM
75
Figure 12 – Price cap by cluster, Peninsular
Source: MAVCOM analysis, MAHB
Figure 13 – Price cap by cluster, Sarawak
Source: MAVCOM analysis, MAHB
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2018A 2019F 2020F 2021F 2022F
Price c
ap (
RM
)
MAHB MAVCOM
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2018A 2019F 2020F 2021F 2022F
Price c
ap (
RM
)
MAHB MAVCOM
76
Figure 14 – Price cap by cluster, Sabah
Source: MAVCOM analysis, MAHB
(the remainder of this page is intentionally left blank)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2018 2019 2020 2021 2022
Price c
ap (
RM
)
MAHB MAVCOM
77
ILLUSTRATIVE PRICE CAP
The tables below illustrate the price cap based on MAHB November 2018 submission and the
Commission draft base case for the 4 clusters. This approach would still allow some cross-
subsidisation between airports within each cluster.
The Commission will be regulating MAHB through the setting of the average price caps for
RP1. This forms the basis of the final tariffs for RP1 that the Commission targets to gazette in
October 2019.
The Commission has two options in implementing the price caps, either via applying an annual
price cap revision or by applying an average price cap in the first year of RP1 which will be
fixed throughout the RP. The former would result in a smoother trajectory of tariff increases (in
an environment of increased capex) but would however entail annual revisions in tariffs. The
latter, meanwhile, would result in only one tariff revision per RP but may lead to steeper
increases in RP2.
Price cap for
RP1 (RM)
MAHB November 2018 submission MAVCOM
draft base case*
2020 2021 2022 Average 2020 2021 2022 Average
All airports 53.0 57.6 63.8 58.1 42.2 43.1 43.3 42.9
* excludes STOLports
Table 25 – Illustrative price cap for all airports
Source: MAVCOM Analysis
Price cap for
RP1 (RM)
MAHB November 2018 submission MAVCOM
draft base case*
2020 2021 2022 Average 2020 2021 2022 Average
KUL 69.4 72.5 78.5 73.5 55.2 54.6 53.6 54.5
Peninsular 38.2 48.5 56.6 47.8 28.9 34.7 37.3 33.6
Sarawak 26.5 29.8 34.8 30.4 22.5 23.7 24.4 23.5
Sabah 22.2 26.3 30.9 26.4 18.1 18.9 19.8 18.9
* excludes STOLports
Table 26 – Illustrative price cap per cluster
Source: MAVCOM Analysis
78
ILLUSTRATIVE TARIFF STRUCTURE
There are various ways by which the RAB Framework could be structured. The responsibility
of proposing tariffs could be placed with MAHB provided that they are within the regulated
price cap set by the Commission. Ultimately, the Commission shall determine the tariffs
pursuant to Act 771.
This section lays out 3 options of structuring the RAB Framework – network, geographical
cluster and geographical cluster with equalised international tier – and the features, pros and
cons, as well as the resulting illustrative tariffs for each option. The illustrative tariffs below are
premised on the assumptions set out earlier in this Consultation Paper. All options assumed
PSC invoicing split by stage of flight.
Feedback from stakeholders on these options are sought, particularly on the preferred option
which the Commission should pursue.
Differentiated charges by level of service and infrastructure
As stated in the Commission’s public pronouncements since 2017, a key objective which the
Commission wishes to fulfil in this present exercise is to depart from the current regime of
uniform airport aeronautical charges in Malaysia which has been in place at least since the
1990s, and instead arrive at a set of tariffs for each airport or group of airports that are
differentiated in accordance to their level of service and infrastructure. The Commission views
this as essential, particularly for the PSC, to ensure that passengers pay for charges that
commensurate to facilities or level of service which they use when at the airport. This approach
has been generally supported by stakeholders throughout the Commission’s consultations to
date. The Commission thus seeks to have in place such differentiated charges regardless of
the option that is eventually adopted.
In order for the Commission to form a view on the tiering of airports operated by MAHB for this
purpose, the Commission has developed a matrix based on the level of facilities at the airports
within the MAHB system, which takes into account, amongst others, terminal designed
capacity, peak hour passengers handled, number of check-in counters, number of immigration
counters, number of aircraft parking bays, number of car parking lots, number of aerobridges,
number of carousels for arriving passengers and operating hours. The matrix is found in
Appendix 2.
Based on this matrix, the Commission has grouped the airports within the MAHB system into
the following 4 groups (excluding STOLports):
a) Tier 1 – KUL (both KUL-T1 and KUL-T2);
b) Tier 2 – PEN, KCH and BKI;
c) Tier 3 – LGK, SZB, SBW, MYY, TWU and KBR; and
d) Tier 4 – IPH, MKZ, KUA, AOR, TGG, BTU, SDK, LBU, LMN, MZV and LDU.
79
Whenever possible, the airports residing in Tier 1 will have the highest charges whilst the
airports residing in Tier 4 will have the lowest charges.
The feasibility and appropriateness of applying this tiering system in the different RAB
Framework options are further discussed below.
Transfer PSC
The Commission proposes to allow for the introduction of transfer PSC (excluding self-
connecting passengers) to be applied for both domestic and international connections under
all scenarios. A domestic and international transfer PSC would apply as follows:
a) domestic transfer PSC - chargeable to passengers who are scheduled to depart from a
domestic destination to another domestic destination (within Malaysia), within a certain
number of hours of arriving at the transfer airport; and
b) international transfer PSC - chargeable to passengers who are scheduled to depart from
any airport in Malaysia to another international destinations (including domestic to
international transfers), within a certain number of hours of arriving at the transfer airport.
In this analysis, the Commission assumes the transfer PSC apply for transfer journeys where
a flight is scheduled to depart within 24 hours of arrival at the transfer airport.
The transfer PSC is typically applied in hub airports regionally and globally. For instance,
Changi Airport charges a transfer PSC of SGD6 per departing passenger. Transfer
passengers here refer to passengers who, as evidenced by a single passenger ticket, is
scheduled to depart from Singapore within 24 hours of his scheduled time of arrival, and on
an aircraft with a different flight number, for a destination in another country other than the
country from which he embarked on the aircraft by which he arrived in Singapore14.
The benefits of allowing for the introduction of a transfer PSC in airports in Malaysia include:
a) to assist in absorbing the regulated revenue per departing passenger over more revenue
items and therefore reduce the burden on PSC, landing fees and aircraft parking fees;
and
b) to reduce the loss in revenues which was and is currently not captured for transit and
transfer passengers.
14 https://www.changiairport.com/content/dam/cacorp/documents/changiairportgroup/List%20of%20Fees%20and%20Charges.pdf
80
Landing & parking fees
The illustrated PSC figures for all 3 options below assume the total regulated landing and
parking revenues to increase by 5% per annum in each year throughout RP1, and the landing
and parking fees do not change. This is in line with MAHB’s passenger growth forecast of
approximately 5% per annum throughout RP1.
If the landing and parking fees were assumed to increase, the PSC would correspondingly
decrease. However, an increase in landing and parking tariffs per aircraft will increase the
operating costs of airlines directly. This cost may potentially be passed to the end users.
Option #1 – Single network
For Option #1 – Network, the entire MAHB network would be approached by the Commission
as a single RAB Framework. The primary objective of structuring the RAB in this manner
therefore would be to ensure the economic feasibility of MAHB’s airports as a single network.
Illustrative resultant PSC for the different airports within the MAHB system would be as follows:
Table 27 – Illustrative tariffs: Option #1
Source: MAVCOM analysis
The primary benefit of applying this single network approach is that it generates rates that
commensurate with the level of service and infrastructure of an airport. In addition, passengers
at all airports in Malaysia aside from KUL could potentially enjoy lower PSC during RP1 in
comparison to the current level of charges.
The drawbacks to applying option #1 are as follows:
a) the 4 individual geographical clusters envisioned by the currently negotiated new set of
OAs will register uneven returns, with the KUL and Sabah OA clusters likely to enjoy
excessive implied returns, while the Peninsular and Sarawak OA clusters would record
low implied returns or possibly, losses;
Domestic International
Tier 1 12.00 40.00 82.00
Tier 2 10.00 32.00 70.00
Tier 3 9.00 30.00 65.00
Tier 4 8.00 25.00 50.00
Grouping
PSC (RM)
5.00 20.00
TransferBeyond
ASEANASEANDomestic
MKZ, KUA, AOR,
TGG, IPH, LDU, LBU,
BTU, MZV, LMN
Airport network
PEN, BKI, KCH
LGK, SZB, KBR,
TWU, SDK, SBW,
MYY
KUL
81
b) continued cross subsidisation of loss-making airports by the profitable airports within
MAHB’s network; and
c) potentially reduces significantly any incentive, rationale or option for MAHB to introduce
third party investors at OA level and therefore reinforces the monopoly airport industry
structure in Malaysia.
Option #2 – Geographical clusters
For Option #2 – Geographical cluster, the RAB Framework would be approached by the
Commission as 4 clusters, which are KUL, Peninsular, Sabah and Sarawak. The key objective
of having differentiated RAB Framework by cluster would be to align closer to user-pay
principle and move away from the cross-subsidisation across airport network.
Illustrative resultant PSC for the different airports within the MAHB system would be as follows:
Table 28 – Illustrative tariffs: Option #2
Source: MAVCOM analysis
The benefit of applying the geographical clusters is that it will enable each cluster to be
financially viable on a standalone basis and potentially attract third party investors at the cluster
level. In addition, this approach would confine any cross-subsidisation to be within each
individual cluster.
The key drawback to applying option #2 is that tariffs for some airports at the lower tiers will
be higher than airports in higher tiers, in order to ensure that each individual cluster is
Domestic International
Tier 1 KUL 12.50 37.90 80.00
KCH 16.00 60.00 105.00
PEN 15.00 48.00 100.00
BKI 7.00 26.00 38.00
SBW, MYY 12.00 45.00 90.00
LGK, SZB,
KBR 10.50 34.00 70.00
TWU, SDK 6.50 23.00 33.00
BTU, MZV,
LMN 11.00 35.00 80.00
MKZ, KUA,
AOR, TGG,
IPH
9.00 29.00 60.00
LDU, LBU 6.00 20.00 30.00
Tier 3
Tier 4
Sabah Sarawak DomesticGrouping
Tier 2
5.00 20.00
Cluster PSC (RM)
ASEANBeyond
ASEAN
TransferKUL Peninsular
82
financially viable on a standalone basis. For instance, PSC at KCH, SBW and MYY will be
higher than at KUL should the charges be set by clusters. This is mainly resulting from those
lower tier airports having a lower number of international passengers.
Option #3 – Geographical clusters, with equalised International PSC
Option #3 is similar to Option #2 with the exception that the ASEAN PSC is equalised to the
Beyond ASEAN PSC. The illustrative PSC would be as follows:
* International include ASEAN and Beyond ASEAN
Table 29 – Illustrative tariffs: Option #3
Source: MAVCOM analysis
With the exception of PEN and KCH, the illustrative tariffs do follow the PSC based on the
level of facilities. Nevertheless, Sarawak cluster continues to reflect a higher PSC as compared
to the Peninsular and Sabah clusters with similar level of facilities as tabulated above.
Domestic International
Tier 1 KUL 11.00 60.00
KCH 16.00 77.00
PEN 11.00 65.00
BKI 7.00 36.00
SBW, MYY 11.00 50.00
LGK, SZB,
KBR 10.00 38.00
TWU, SDK 6.50 26.00
BTU, MZV,
LMN 9.00 45.00
MKZ, KUA,
AOR, TGG,
IPH
9.00 34.00
LDU, LBU 6.00 23.00
Tier 2
Tier 3
Tier 4
Transfer International*DomesticSarawakSabah
Grouping
5.00 20.00
Cluster PSC (RM)
Peninsular KUL
83
MAHB’s tariff proposal per June 2019 submission
As part of its June 2019 submission, MAHB had also submitted proposed tariffs. This is
discussed further in Section 8.0.
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84
MAHB’S JUNE 2019 SUBMISSION
MAHB had submitted updates to its BP and CIP to the Commission on 3 June 2019, whereby
revised projections and 3 tariff scenarios were proposed. It should be noted that this
submission was not reviewed by the Commission as the submission was made just before the
publication of this Consultation Paper.
In terms of capex, in its June 2019 submission MAHB had proposed a capex of approximately
RM6.2 billion for the 2019 to 2022 period (RM5.2 billion for RP1). This is significantly lower
than the November 2018 submission as MAHB had deferred a large number of projects.
Nevertheless, it is still higher than the Commission’s revised base case of RM5.0 billion and
the Commission has been informed that MAHB is currently reviewing its traffic projections and
plans to submit a revised forecast as part of its written feedback to this Consultation Paper.
MAHB had stated that the projections submitted are illustrative and are pending further
diligence, whereby final numbers may vary by -/+ 30% from the projections.
Despite the lower capex programme, MAHB is forecasting a higher depreciation amount which
was attributed to a revision in the UOP depreciation method, where MAHB now applies a
passenger volume cap of 130%. The previous UOP was based on an unconstrained method.
It should also be noted that MAHB apportions the operating cost of HQ and STOLports across
all airports in its network, instead of allocating these costs by their respective regional clusters.
The lower capex programme is as tabulated below.
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
KUL 6,300 2,900 Detailed in the tables that follow
PEN 750 1,150 Detailed in the tables that follow
SZB 150 150 Detailed in the tables that follow
TWU 100 100 Detailed in the tables that follow
LGK 350 350 Detailed in the tables that follow
BKI 500 100 Includes master planning and schematic &
design work with maintenance capex and asset
optimization
KCH 450 100 Includes master planning and schematic &
design work with maintenance capex and asset
optimization
SBW 100 10 Includes master planning and schematic &
design work with maintenance capex
KBR 500 10 Airport development undertaken by GoM,
remainder due to maintenance capex
SDK 100 10 Airport development undertaken by GoM,
remainder due to maintenance capex
85
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Others 100 150 Total amount due to maintenance capex (small
fragmented projects) in other airports in the
network
HQ 500 200 Ensure HQ can effectively support airports via
rebranding project, corporate office expansion
and SAP system renewal
Total 9,900 5,230 -
Table 30 – Comparison from MAHB’s November 2018 to June 2019 capex plan
Source: MAHB
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86
The lower capex programme for KUL, PEN, LGK, SZB and TWU are as tabulated below.
MAHB has not submitted similar detailed breakdowns for the other airports.
KUL
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Development
capex
3,650 300 Includes master planning and schematic design
work for KUL-T1 and KUL-T2
Capacity
debottle-
necking
650 1,100 Replacement of end-of-life equipment and
upgrades to improve efficiency:
- Baggage flow
- Aerotrain replacement
- Airport Management Centre
- Taxiway loop
- Asset optimisation
Infrastructure
refurbishment
750 600 Repairs to outdated and damaged infrastructure:
- Pavement repairs
- Building facility maintenance
Customer
experience
enhancement
300 200 Uplift customer experience:
- Commercial reset
- Terminal ambience
- Big Data analytics
- Customer navigation
Safety and
security
450 400 Replacement of end-of-life equipment and meet
rising compliance standards:
- Security processing
- CCTV
- Fire safety
- Air ground lighting
Others 500 300 Other minor fragmented maintenance capex
items
Total 6,300 2,900 -
Table 31 – Comparison from MAHB’s November 2018 to June 2019 capex plan for KUL
Source: MAHB
PEN
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Development
capex
700 1,100 Expansion of capacity to 12 mppa or (12+4)
mppa from 6.5 mppa to alleviate current capacity
constraints.
Key terminal and landside upgrades:
- Expansion of the terminal building to
accommodate new passenger
processing area and contact pier
- New access roads and ramps, drainage
system and other infrastructure works
87
PEN
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Key airside upgrades:
- Reconfiguration of the aircraft parking
apron
- Expansion of aircraft parking apron for
new aircraft stands
- New taxiways to expanded aircraft
parking apron area
- New AFRS station
- New Helipad
- New ATC tower and CAAM
administration office
- New meteorological station
Maintenance
capex
50 50 Minor maintenance capex works
Total 750 1,150 -
Table 32 – Comparison from MAHB’s November 2018 to June 2019 capex plan for PEN
Source: MAHB
LGK
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Development
capex
330 330 PBB and terminal expansion required to:
- cater to wide-body aircraft by preventing
congestion
- ensure international and domestic
passenger segregation on the tarmac
and baggage reclaim area
- improve customer experience
Key terminal and landside upgrades:
- Expansion and upgrading of the existing
terminal building including:
1) Upgrading of arrival facilities –
separate baggage reclaims areas for
domestic and international and
immigration (arrival)
2) Minor space reconfiguration at
departure holding lounge and
security screening (departure) – two-
level contact pier with holding lounge
Key airside upgrades:
- Installation of aerobridges for contact
stand
- Reconfiguration of existing aircraft
stands
88
LGK
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Maintenance
capex
20 20 Minor maintenance capex works
Total 350 350 -
Table 33 – Comparison from MAHB’s November 2018 to June 2019 capex plan for LGK
Source: MAHB
SZB
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Development
capex
140 140 Expansion of capacity to 5 mppa from 1.5 mppa
Key terminal and landside upgrades:
- Expansion and upgrading of the existing
terminal building
- Extension of existing curb side
- Check-in counters with ILHBS
Key airside upgrades:
- Expansion of existing aircraft parking
apron to accommodate additional
aircraft parking bays
- New taxiways to expanded apron area
Maintenance
capex
10 10 Minor maintenance capex works
Total 150 150 -
Table 34 – Comparison from MAHB’s November 2018 to June 2019 capex plan for SZB
Source: MAHB
TWU
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
Development
capex
95 95 Expansion of capacity to 2.5 mppa from 1.5
mppa
Key terminal and landside upgrades:
- Modernization of terminal building
- Reconfiguration of the terminal building
- Check-in counters with Inline Hold
Baggage Screening System
- Dedicated international and domestic
holding lounge
- Dedicated international and domestic
baggage reclaim carousel
Key airside upgrades:
89
TWU
MAHB Nov
2018
submission
(RM million)
MAHB June
2019
submission
(RM million)
June 2019 capex details
- Reconfiguration of existing aircraft
parking apron
- Expansion of aircraft parking apron for
new aircraft stands
- New PBBs and VGDS
Maintenance
capex
5 5 Minor maintenance capex works
Total 100 100 -
Table 35 – Comparison from MAHB’s November 2018 to June 2019 capex plan for TWU
Source: MAHB
In addition, MAHB had assumed a materially lower amount of user fees of RM65 million in
RP1. The user fee quantum is currently being discussed as part of the renegotiation of the OA.
MAHB noted that higher user fees will result in higher regulated revenues and subsequently
higher charges. MAHB has also assumed a WACC of 12.7% which is higher than the 10.88%
adopted by the Commission.
The updated MAHB forecasts for the RAB Framework in both network and clusters scenarios
are as tabulated below.
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 8,341.3 8,347.4 8,867.5 10,215.3 11,336.6
Net capex (including disposals) 348.5 947.3 1,873.8 1,738.1 1,597.4
Depreciation (342.4) (427.2) (526.0) (616.8) (714.4)
RAB Closing balance 8,347.4 8,867.5 10,215.3 11,336.6 12,219.5
Operating costs 1,911.0 2,140.4 1,859.9 1,922.6 1,974.2
Depreciation 342.4 427.2 526.0 616.8 714.4
Return on capital (WACC) 1,059.7 1,093.1 1,211.8 1,368.5 1,495.8
Non-regulated aeronautical revenues (65.9) (66.4) (70.6) (75.3) (80.1)
Non-aeronautical revenues (1,163.7) (1,213.9) (1,294.0) (1,474.6) (1,573.5)
Regulated revenues 2,083.5 2,380.4 2,233.1 2,358.1 2,530.8
Departing passengers (thousands) 49,721.0 52,220.3 55,311.8 58,578.8 62,004.3
Price cap (RM) 41.9 45.6 40.4 40.3 40.8
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 36 – Overall RAB and price cap for MAHB - all airports (MAHB June 2019)
Source: MAHB June 2019 submission
90
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 7,325.5 7,282.5 7,528.7 8,509.4 8,840.7
Net capex (including disposals) 240.2 592.6 1,410.3 841.9 768.2
Depreciation (283.1) (345.8) (429.7) (510.7) (587.3)
RAB Closing balance 7,282.5 7,528.7 8,509.4 8,840.7 9,021.7
Operating costs 1,390.1 1,569.6 1,355.2 1,390.5 1,431.3
Depreciation 283.1 345.8 429.7 510.7 587.3
Return on capital (WACC) 928.2 940.5 1,018.4 1,101.7 1,134.3
Non-regulated aeronautical revenues (50.8) (49.8) (52.2) (55.3) (59.1)
Non-aeronautical revenues (962.5) (994.4) (1,063.2) (1,210.3) (1,296.9)
Regulated revenues 1,588.2 1,811.8 1,687.9 1,737.3 1,796.9
Departing passengers (thousands) 30,140.9 30,381.2 32,311.3 34,351.0 36,489.3
Price cap (RM) 52.7 59.6 52.2 50.6 49.2
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 37 – Overall RAB and price cap for MAHB – KUL (MAHB June 2019)
Source: MAHB June 2019 submission
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 769.5 789.4 943.3 1,179.4 1,864.8
Net capex (including disposals) 59.1 204.0 290.5 743.3 721.4
Depreciation (39.3) (50.5) (54.4) (57.9) (67.2)
RAB Closing balance 789.4 943.3 1,179.4 1,864.8 2,518.9
Operating costs 242.5 262.8 233.6 246.4 250.6
Depreciation 39.3 50.5 54.4 57.9 67.2
Return on capital (WACC) 98.4 110.0 134.8 193.3 278.4
Non-regulated aeronautical revenues (6.0) (6.4) (6.8) (7.3) (7.7)
Non-aeronautical revenues (117.1) (136.4) (145.1) (164.7) (171.5)
Regulated revenues 257.2 280.4 270.9 325.6 417.0
Departing passengers (thousands) 8,293.8 8,791.8 9,318.0 9,873.9 10,456.7
Price cap (RM) 31.0 31.9 29.1 33.0 39.9
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 38 – Overall RAB and price cap for MAHB – Peninsular (MAHB June 2019)
Source: MAHB June 2019 submission
91
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 94.8 118.1 183.0 258.6 340.4
Net capex (including disposals) 32.6 79.4 94.9 104.3 40.5
Depreciation (9.3) (14.8) (19.3) (22.5) (29.0)
RAB Closing balance 118.1 183.0 258.6 340.4 351.8
Operating costs 155.8 168.1 145.8 153.6 157.5
Depreciation 9.3 14.8 19.3 22.5 29.0
Return on capital (WACC) 13.5 19.1 28.0 38.0 44.0
Non-regulated aeronautical revenues (4.8) (6.0) (6.6) (7.5) (7.9)
Non-aeronautical revenues (53.6) (54.7) (56.7) (65.5) (69.3)
Regulated revenues 120.2 141.4 129.7 141.0 153.3
Departing passengers (thousands) 5,955.8 6,899.2 7,239.6 7,599.4 7,976.5
Price cap (RM) 20.2 20.5 17.9 18.6 19.2
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 39 – Overall RAB and price cap for MAHB – Sabah (MAHB June 2019)
Source: MAHB June 2019 submission
RM million 2018A 2019F 2020F 2021F 2022F
RAB Opening balance 151.5 157.4 212.5 267.9 290.7
Net capex (including disposals) 16.5 71.2 78.0 48.6 67.3
Depreciation (10.6) (16.1) (22.6) (25.8) (30.9)
RAB Closing balance 157.4 212.5 267.9 290.7 327.1
Operating costs 122.6 139.9 125.4 132.2 134.8
Depreciation 10.6 16.1 22.6 25.8 30.9
Return on capital (WACC) 19.6 23.5 30.5 35.5 39.2
Non-regulated aeronautical revenues (4.3) (4.2) (5.0) (5.2) (5.4)
Non-aeronautical revenues (30.6) (28.4) (29.0) (34.1) (35.8)
Regulated revenues 117.9 146.9 144.5 154.1 163.7
Departing passengers (thousands) 5,252.9 6,070.9 6,362.8 6,671.5 6,995.6
Price cap (RM) 22.4 24.2 22.7 23.1 23.4
Note: 2018 and 2019 price caps are illustrative of what price caps would have been had the RAB Framework been in place
and do not reflect the actual revenues per departing passenger in 2018 and 2019
Table 40 – Overall RAB and price cap for MAHB – Sarawak (MAHB June 2019)
Source: MAHB June 2019 submission
In addition to the revised projections, MAHB has also submitted 3 options for the proposed
tariffs. For all 3 options, MAHB is proposing for total landing and parking regulated revenues
to increase by 16.0% in 2020.
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MAHB is also proposing to introduce transfer PSC at RM3 and RM17 for domestic transfer
and international transfer departing passengers respectively (for all transit and transfer
passengers for up to 24 hours). Any transferring passengers departing more than 24 hours
after arrival at the transit airport are to be considered as originating passengers who will be
required to pay the full relevant PSC.
In each of the 3 options provided by MAHB, a WACC of 12.7% was applied at cluster level. In
the future, a different WACC could be applied by cluster. All options assumed PSC invoicing
split by stage of flight.
The details of MAHB’s proposed tariffs are provided below.
MAHB’s proposed tariff – Option #1
In Option #1, MAHB’s approach is by equalising the ASEAN and Beyond ASEAN PSCs, whilst
keeping the Domestic PSC for all airports unchanged at RM11 per departing passenger. The
International PSC for KCH and PEN are higher than KUL. This is illustrated in the following
table:
* International include ASEAN and Beyond ASEAN
Table 41 – MAHB’s proposed tariff Option #1
Source: MAHB
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Domestic International
KUL 62.00
PEN 67.00
LGK, SZB BKI 59.00
KCH 114.00
MYY, SBW 40.00
35.00
Cluster
TransferInternational*Domestic SarawakSabahPeninsularKUL
PSC (RM)
Others
3.00 17.00 11.00
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MAHB’s proposed tariff – Option #2
Option #2 also equalises the ASEAN and Beyond ASEAN PSC. However, the Domestic PSC
for all airports is increased to RM14 per departing passenger.
* International include ASEAN and Beyond ASEAN
Table 42 – MAHB’s proposed tariff Option #2
Source: MAHB June 2019 submission
MAHB’s proposed tariff – Option #3
In Option #3, MAHB is keeping the 3-tier PSC rates of Domestic, ASEAN and Beyond ASEAN
PSC. The Domestic PSC at all airports is increased to RM14 per departing passenger while
PEN, BKI and KCH charges ASEAN PSC higher than KUL.
Table 43 – MAHB’s proposed tariff Option #3
Source: MAHB June 2019 submission
MAHB has stated its preference for Option #2, citing that it is the only option that results in
tariffs for other airports being lower than KUL.
Domestic International
KUL 60.00
PEN 59.00
LGK, SZB BKI KCH 55.00
MYY, SBW 35.00
35.00
Cluster PSC (RM)
KUL Peninsular Sabah Sarawak Domestic Transfer
14.00 3.00 17.00
Others
International*
Domestic International
KUL 38.00 80.00
PEN 56.00 80.00
BKI KCH 53.00 80.00
LGK, SZB 38.00 73.00
MYY, SBW 38.00 38.00
35.00 35.00
14.00 3.00 17.00
Others
Cluster Tariff
KUL Peninsular Sabah Sarawak Domestic ASEANBeyond
ASEAN
Transfer
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CONSULTATION PROCESS
When implementing the RAB framework, extensive consultation exercises with affected
stakeholders support the decision-making on the level of aeronautical tariffs for the control
period. These include consultations conducted by the airport operator and also consultations
undertaken by the Commission.
In designing the consultation process, the Commission will refer to the available guidelines on
best practices based on the IATA’s ‘Airport Infrastructure Investment – Best Practice
Consultation’ document and ACI’s ‘Recommended Practices on transparency and
consultation’ document.
Consultees will be given the opportunity to comment on the information presented and
decisions made by the Commission. The consultation sessions may consist of one the
following:
a) separate meetings with main proponents (airport operators, airlines and the airline and
airport associations);
b) open forum for industry stakeholders in the same session;
c) open forum for investors and analysts; and
d) papers to be made publicly available for all parties to make written submissions.
The stakeholders will be given 4 weeks up to Thursday 18 July 2019 (5pm) to provide written
responses, notwithstanding any additional follow-up meetings for clarification purposes that
may be held within this period.
The consultation provides stakeholders the opportunity to provide additional information which
may not have been taken into consideration by the Commission. The Commission reserves
the right to reflect upon, and amend its position, subject to new materials, arguments,
information and data being presented. In the longer term, the Commission plans to move to a
fully transparent RAB framework where all stakeholder feedback and BP by the airport
operator will be made public.
The Commission’s final decision on the prices and tariffs for RP1 will be contained in a final
report which will explain the new information presented by stakeholders and how these have
been reflected in any amendments between the draft and final Commission position on specific
issues.
The Commission will announce the final decision by October 2019.
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NEXT STEPS
Details of the consultation
The Commission is inviting comments within 4 weeks of publication of this consultation paper
(Thursday, 18 July 2019 at 5pm).
All comments on the document must be in writing and are to be delivered via email to
[email protected] or by post to the following address:
Malaysian Aviation Commission
Level 19, Menara 1 Sentrum
201, Jalan Tun Sambanthan
50470 Kuala Lumpur, Malaysia
Attn: Ms. Yusniza Wan Yahya
In conjunction with the feedback period, the Commission will be meeting with industry
stakeholders during the June and July period to obtain further responses and comments from
the industry.
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96
APPENDIX 1: TRAFFIC FORECAST FROM MAHB
As part of the BP and CIP submission, MAHB had submitted its traffic forecast for the period
between 2019 and 2022. The Commission then reviewed the traffic forecast as detailed out
below. The objective is to ascertain the reasonability of the forecast to be inserted into the
RAB model for the eventual target of calculating the regulated revenue per departing
passenger at all MAHB airports.
Historical traffic (2012 to 2018)
MAHB’s passenger traffic forecast model is driven by GDP
MAHB forecasts its passenger traffic using an econometric model with GDP as the
independent variable and passenger traffic as the dependent variable. The company uses the
model to derive the domestic, international, and total passenger traffic for every airport
operated by MAHB (39 out of 42 airports in Malaysia). The model was also subject to relevant
statistical checks such as significance of variance, goodness of fit, and autocorrelation. Other
checks indicate that the correlation between GDP and passenger traffic is 0.98, indicating that
passenger traffic and GDP are strongly related.
Given that the model is purely GDP-driven, adjustments are made to the regression output by
considering the non-GDP demand factors such as, the relaxing of tourist visa policies, currency
fluctuations, and special events such as elections or tourism promotions. The output of the
model was also adjusted for supply-side factors such as, airlines’ schedule and fleet delivery
plans. The adjustments made on supply conditions to the output of the GDP-driven regression
model moderates the passenger traffic growth. The risk of demand-driven models is that it
assumes that growth is unfettered so long as there is demand, and does not consider
infrastructure constraints, among others.
MAHB’s passenger traffic model may be missing other factors that influence passenger traffic
volume. Despite the adjustments made to the output of the model to consider other factors
beyond GDP, MAHB’s forecasted passenger traffic has underpredicted actual figures in 5 of
the last 7 years (see Figure 15). This suggests that there are other factors at play and may
need to be included in the regression model.
97
Figure 15 – Actual vs. forecasted passenger traffic, 2012 - 2018
Source: MAHB. Note: All airports in Malaysia operated by MAHB
MAHB’s forecasted passenger traffic (2019 to 2022)
Passenger traffic to grow at an annual growth rate of 5.7% per year between 2018 and
2022
MAHB initially forecasted that its airports in Malaysia will handle 128.0 million passengers in
2022 before downgrading the number to 122.5mn. In 2018, the company had forecast that its
airports in Malaysia will handle 104.0 million passengers in 2019. This represents a growth of
+4.9% YoY from its 2018 passenger traffic.
However, this is -4.9% lower than MAHB’s initial forecast made in 4Q17 of 109.0 million
passengers. MAHB had lowered its forecast owing to a change in their key assumption of
growth in Malaysia GDP (+4.7% from an initial +5.0%). The company also adjusted their
forecast output to take into account an increase in crude oil prices, from a forecast price of
USD55/bbl to around USD71/bbl, and a lower level of growth in seat capacity from Malaysian
carriers.
Based on these trends, MAHB’s long term forecast has also changed as it is now projecting
an annual growth rate of +5% per annum between 2018 and 2022 instead of its original
forecast +6% per annum (see Figure 16).
65.3
71.9
82.4
85.8
86.0
94.7
103.4
67.2
79.683.3
83.8
89.0
96.699.1
60.0
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75.0
80.0
85.0
90.0
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100.0
105.0
2012 2013 2014 2015 2016 2017 2018
Pa
sse
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Tra
ffic
(m
illio
n)
Projected Actual
98
Figure 16 – Original vs. Revised Passenger Traffic Forecast, 2017 – 2022
Source: MAHB
MAVCOM’s forecasted traffic (2020-2022)
According to the ICAO’s Manual on Air Traffic Forecasting, several methodologies may be
employed to forecast passenger demand. These methodologies include regression analyses,
time series analyses, and market research and industry surveys. Amongst these, regression
analyses are the most common, and are based on establishing a causal relationship between
the dependent variable—in this case, passenger traffic—and a set of independent variables.
99.1
109.0
115.0
121.0
128.0
104.0
110.6
117.2
122.5
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
2018 2019 2020 2021 2022
Pa
ss
en
ge
r T
raff
ic (
mil
lio
n)
Original Revised
99
Description of MAVCOM’s passenger traffic forecast model
Description of the independent variables
MAVCOM’s passenger demand forecast used annual time series data from 2000 to 2018. The
passenger traffic is divided and forecasted according to 4 clusters of airports proposed
under the RAB framework, which are:
a) KUL
b) Peninsular
c) Sabah
d) Sarawak
The dependent variables for each of the clusters, in this case, was the sum of passenger traffic
in all airports in the cluster, while the independent variables tested consisted of Malaysia’s
GDP (constant), crude oil price, the RM/USD exchange rate, and the percentage of the
sum of the GDP for all states in the cluster to the overall GDP of Malaysia. For Peninsular,
JHB is excluded from the model as the clusters include MAHB-operated airports only. The
variables included in the models, along with their sources, are as stated in the table below.
Variables Source
Sum of passenger traffic according to
clusters MAHB
GDP (Constant) – Malaysia Oxford Economics
Crude oil price Thomson Reuters
RM/USD exchange rate Bloomberg
Percentage of sum of state GDP to
Malaysia’s GDP according to clusters DOSM
Table 44 – Variables used in MAVCOM’s passenger traffic forecast model
Source: MAVCOM analysis
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100
For the purpose of forecasting the future passenger traffic for Malaysia, a number of
regression analysis were tested using a multiple linear regression model for each
cluster with one period lagged independent variables. The lagged variables function to
address issues on endogeneity. The model that was found to have the best fit was the model
that includes Malaysia’s GDP (constant), crude oil price, exchange rate, and percentage of
state GDP are as tabulated below.
Cluster Model
KUL 𝐿𝑛𝑃𝑎𝑥𝑡 = −3.8212 + 1.7402 𝐿𝑛𝑀𝑎𝑙𝑎𝑦𝑠𝑖𝑎𝐺𝐷𝑃𝑡−1 −
0.3103 𝐿𝑛𝐹𝑜𝑟𝑒𝑥𝑡−1 − 0. +0160 𝐿𝑛𝑂𝑖𝑙𝑡−1
Peninsular 𝐿𝑛𝑃𝑎𝑥𝑡 = −9.1699 + 2.2364 𝐿𝑛𝑀𝑎𝑙𝑎𝑦𝑠𝑖𝑎𝐺𝐷𝑃𝑡−1 − 1.1766 𝐿𝑛𝐹𝑜𝑟𝑒𝑥𝑡−1
− 0.2632 𝐿𝑛𝑂𝑖𝑙𝑡−1 − 0.0183 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒𝑠𝑡𝑎𝑡𝑒𝐺𝐷𝑃𝑡−1
Sabah 𝐿𝑛𝑃𝑎𝑥𝑡 = 1.0457 + 1.1832 𝐿𝑛𝑀𝑎𝑙𝑎𝑦𝑠𝑖𝑎𝐺𝐷𝑃𝑡−1 − 0.0792 𝐿𝑛𝐹𝑜𝑟𝑒𝑥𝑡−1
+ 0.0155 𝐿𝑛𝑂𝑖𝑙𝑡−1 + 1.7609 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒𝑠𝑡𝑎𝑡𝑒𝐺𝐷𝑃𝑡−1
Sarawak 𝐿𝑛𝑃𝑎𝑥𝑡 = 4.2245 + 0.9681 𝐿𝑛𝑀𝑎𝑙𝑎𝑦𝑠𝑖𝑎𝐺𝐷𝑃𝑡−1 − 0.2054 𝐿𝑛𝐹𝑜𝑟𝑒𝑥𝑡−1
+ 0.0659 𝐿𝑛𝑂𝑖𝑙𝑡−1 − 4.0097 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒𝑠𝑡𝑎𝑡𝑒𝐺𝐷𝑃𝑡−1
Table 45 – MAVCOM’s regression model by cluster
Source: MAVCOM analysis
Overall, the models showed that higher Malaysia GDP would have a positive impact on
passenger traffic on each of the clusters. At the same time, appreciating RM/USD has a
negative impact on passenger traffic for all of the 4 clusters. Changes in exchange rates
affect consumers’ travelling decisions, while crude oil price typically represents a proxy to cost
of air travel.
For KUL and Peninsular clusters, the rise in crude oil price would result in a lower
passenger traffic whilst the opposite is true for Sabah and Sarawak clusters, in which
an increase in crude oil price would increase its passenger traffic. As mentioned in the previous
section, this could be that the population in Sabah and Sarawak are more income inelastic to
changes in airfare from rising oil prices given the lack of viable alternative transport. Given that
both states also have large oil and gas operations, an increase in oil prices may even increase
passenger traffic as business opportunities and incomes rise.
The percentage of state GDP indicates the economic strength of each cluster. However, this
variable is not included in the KUL regression model as KUL’s passenger traffic is derived from
the strength of Malaysia’s total GDP.
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101
Forecast data and parameters
Referring to the model of best fit, passenger traffic was forecasted for the period 2019 to 2022
by employing the data described in Table 45 below.
No. Variables Forecast figures
1 Malaysia GDP (Constant) • 4.5% YoY growth in 2019
• 4.2% CAGR growth between 2019 and 2022
2 Crude Oil Price • 13.7% YoY decrease in crude oil price to
USD61/BBL in 2019
• -0.9% CAGR growth between 2019 and 2022
3 RM/USD Exchange Rates • RM4.13/USD for 2019
• -2.3% CAGR growth between 2019 and 2022
4 Percentage of sum of state GDP
to Malaysia’s GDP according to
clusters
• The percentage of the clusters’ GDP to Malaysia’s
GDP is assumed to be constant from 2019 to 2022
• Peninsular: 49.1%
• Sabah: 7.6%
• Sarawak: 10.5%
Table 46 – Variables employed to forecast passenger traffic, 2019 – 2022
Source: MAVCOM analysis
The forecast passenger numbers derived from the model were further adjusted to
account for the annual historical trend for additional passengers. For example, between
2008 and 2018, passenger traffic for Malaysia typically grew by 3.2 million to 8.0 million
passengers per annum. Where the model overestimated or underestimated forecasted
numbers, the numbers were adjusted to reflect the typical historical trend.
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102
MAVCOM’s passenger traffic forecast
The forecasted passenger traffic number for each of the 4 clusters will then be added to get
the total forecasted passenger traffic in Malaysia (see Figure 17).
Figure 17 – Air passenger traffic, Malaysia, 2007 – 2022
Source: MAVCOM analysis, MAHB
Based on the forecast, the Malaysia passenger traffic (ex-JHB, Sabah and Sarawak
STOLports) will increase from 99.0 million in 2018 to 115.2 million in 2022, registering a
4-year CAGR of 3.9%. When compared to the forecast made by MAHB, they had forecasted
its passenger traffic higher than the Commissions’ forecast in each year (see Figure 18). The
CAGR growth for MAHB’s forecast from 2018 to 2022 is 5.7%. The higher growth projection
from MAHB may be due to positive adjustments to airline long-term growth plans, new fleet
delivery, and stable fuel prices.
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Figure 18 – MAVCOM vs. MAHB: Malaysia passenger traffic forecast, 2018 – 2022
Source: MAVCOM Analysis, MAHB
In terms of the individual cluster (see Figures 19 – 22), the deviation between the
Commission’s and MAHB’s passenger traffic forecast is largely due to differences in
the KUL, Sabah, and Sarawak clusters, accounting for around 73% of the total variation
between the two sets of forecasts. In particular, the Commission’s model indicates slower
growth in 2019 compared to MAHB’s forecast for Sabah and Sarawak; MAHB forecasts
double-digit growth in 7 of the 11 airports it manages in the two clusters. This is
especially so for BTU, BKI, KCH, SBW, and TWU. As for KUL, MAHB forecasts stronger
growth between 2020 and 2022 than the Commission, driven by growth at KUL-T2.
Figure 19 – MAVCOM vs MAHB: KUL passenger traffic forecast, 2018 – 2022
Source: MAVCOM analysis, MAHB
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2018 2019 2020 2021 2022
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MAVCOM Growth (RHS) MAHB Growth (RHS)
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MAVCOM Growth (RHS) MAHB Growth (RHS)
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Figure 20 – MAVCOM vs MAHB: Peninsular passenger traffic forecast, 2018 – 2022
Source: MAVCOM analysis, MAHB
Figure 21 – MAVCOM vs MAHB: Sabah passenger traffic forecast, 2018 – 2022
Source: MAVCOM analysis, MAHB
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MAVCOM Growth (RHS) MAHB Growth (RHS)
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MAVCOM Growth (RHS) MAHB Growth (RHS)
105
Figure 22 – MAVCOM vs MAHB: Sarawak passenger traffic forecast, 2018 – 2022
Source: MAVCOM analysis, MAHB
Advantages and limitations of MAVCOM’s passenger traffic forecast
model
The Commission’s model is robust as it takes into account more variables that affect
passenger traffic. The Commission’s model includes GDP, oil prices, exchange rates, and
the proportionate share of state GDP as independent variables in the forecast of passenger
traffic in Malaysia by clusters. This makes the Commission’s model robust as it also considers
variables that reflect the cost considerations associated with air travel such as oil prices and
exchange rates, which reflects any potential decreases in demand for air travel by price-
sensitive consumers.
In addition, the inclusion of the proportionate share of state GDP introduces cluster-specific
variables that indicate the economic strength of each cluster. This allows each regression
model to be nuanced by cluster, capturing the varying relationship (see Table 46) that each
cluster has with passenger traffic.
However, the Commission’s model is limited in several ways. Firstly, it does not take into
account of limiting factors such as airport constraints and airline schedules. These constraints
may limit the growth of passenger traffic if there are airport limitations or if airlines do not have
aggressive expansion plans. Secondly, the Commission’s model also assumes that the
proportion share of state GDP in each cluster will remain constant in the first RAB cycle (i.e.
between 2019 and 2022), which may not necessarily be the case. Thirdly, the Commission
does not have access to future expansion plans of airlines and airports, which limits the
accuracy of its model, as airline growth plans or airport expansion may have a stronger
influence on the passenger traffic forecast in the short-term.
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-10
-5
0
5
10
15
20
8
10
12
14
16
18
20
2019 2020 2021 2022
Yo
Y G
row
th (%
)P
asse
ng
er
Tra
ffic
(m
illio
n)
MAVCOM MAHB
MAVCOM Growth (RHS) MAHB Growth (RHS)
106
References
Brons, M. et. al. (2002), Price Elasticities of Demand for Passenger Air Travel: A Meta-
Analysis. Journal of Air Transport Management, 8(3), pp. 165-175
Gillen, D., Morrison, W., and Stewart, C. (2008), Air Travel Demand Elasticities:
Concepts, Issues and Measurement. Retrieved April 30 2019 from
https://www.fin.gc.ca/consultresp/airtravel/airtravstdy_-eng.asp
Smyth, M. and Pearce, B. (2008), IATA Economics Briefing No. 9: Air Travel Demand.
Retrieved April 30 2019 from
https://www.iata.org/publications/economic-briefings/air_travel_demand.pdf
(the remainder of this page is intentionally left blank
107
APPENDIX 2: AIRPORT FACILITIES DATA
Table 47 – Facilities matrix at MAHB airports
Source: MAVCOM analysis, MAVCOM
Grouping Airports
Terminal
designed
capacity
(mppa)
Passengers
per peak hour
capacity
(ppph)
Number of
check-in
counters
Number of
immigration
counters
Number of
aircraft
parkings
bays
Number of
car parking
lots
Number of
aerobridges
Number of
carousels
Operating 24
Hours
Tier 1 KLIA and klia2 >15 >5,000 >100 >100 >50 >6000 >40 >9 Yes
Tier 2 PEN, KCH, and BKI 5-15 2,000-4,999 35 - 99 20 - 99 20 - 49 800 - 1000 5 - 39 4 - 8 Yes
Tier 3 LGK, SZB, SBW, MYY, TWU, KBR 1.5-4.99 500-1,999 11 - 34 11 - 19 5 - 19 300 - 799 2 - 4 2 - 4 No, except LGK
Tier 4IPH, MKZ, KUA, AOR, TGG, BTU, SDK,
LBU, LMN, MZV, and LDU0.01-1.5 100-499 2 - 10 2-10 2 - 4 10 - 299 1 - 2 1 - 2 No
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